American University Law Review
Volume 57 | Issue 2
Article 2
2007
The Sunset of "Quality Control" in Modern
Trademark Licensing
Irene Calboli
Irene.Calboli@marquette.edu
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Part of the Intellectual Property Commons
Recommended Citation
Calboli , Irene. “The Sunset of "Quality Control" in Modern Trademark Licensing.” American University Law Review 57,
no.2(December 2007): 341-407.
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The Sunset of "Quality Control" in Modern Trademark Licensing
Abstract
Historically, based on the premise that trademark protection is about consumer welfare, trademark law has
allowed trademark licensing only as long as licensors control the quality of the products bearing the licensed
marks. Ever since its adoption, however, this rule has been difficult to enforce because it hinges on a concept
that is ambiguous and difficult to frame in a legal context: quality control. Unsurprisingly, the consequence
has been inconsistent case law and much uncertainty as to what represents valid licensing. In addition, in the
past decades, courts have proven increasingly reticent to strictly apply this rule and have declared agreements
with minimal or no control valid as long as the public was not misled. The rise of recent practices such as, inter
alia, promotional trademark licensing has contributed to this trend and highlighted the growing
unsustainability of the current requirement in today's economy. This Article argues against this uncertainty
and advocates for an amendment to the current rule that would allow licensing with or without control. In
support of this change, this Article offers evidence that, contrary to the original intention of the law, this rule is
negatively affecting competition in the marketplace and allowing unfair competitors to initiate frivolous legal
actions. This Article therefore proposes that, rather than focusing on an increasingly sterile and confusing
requirement - quality control - the courts should assess the validity of licensing by focusing directly on the
result of the agreements - whether the use of the licensed marks will deceive consumers.
Keywords
Trademark, Licensing, Quality Control
This article is available in American University Law Review: http://digitalcommons.wcl.american.edu/aulr/vol57/iss2/2
THE SUNSET OF “QUALITY CONTROL” IN
MODERN TRADEMARK LICENSING∗
**
IRENE CALBOLI
TABLE OF CONTENTS
Introduction.........................................................................................342
I. Trademark Licensing Defined..................................................348
II. History of Trademark Licensing and “Quality Control” .........351
A. The Debate on Licensing and Trademark Protection .....351
B. The Rule of Licensing With “Quality Control” .................354
1. The rationale behind “quality control” .......................357
2. Evolution of the standard .............................................360
III. Problems in the Application of “Quality Control”...................364
A. Judicial Inconsistency in Defining “Quality Control”.......364
1. The dilemma of “adequate” control ............................368
2. Shifting focus on product quality? ...............................371
B. Consequences of the Absence of a Clear Definition of
“Quality Control”................................................................374
IV. The Increasing Unsustainability of “Quality Control”.............376
A. The Reality of Modern Trademark Licensing ..................377
1. Promotional licensing and (the lack of) “quality
control”..........................................................................380
2. Additional practices inconsistent with “quality
control”..........................................................................384
∗
© Irene Calboli 2007. All rights reserved.
Assistant Professor of Law, Marquette University Law School. I would like to
thank the participants at the Third Annual Intellectual Property & Communication
Law and Policy Scholars Roundtable, Michigan State University, January 27–28, 2006,
and the 2006 Works-In-Progress Intellectual Property Colloquium, University of
Pittsburgh Law School, October 6–7, 2006, and particularly John Cross, Deven Desai,
Eric Goldman, Laura Hayneman, Mark Lemley, Glynn Lunney, Mike Madison, Mark
McKenna, Adam Mossoff, Josh Sarnoff, Lars Smith, and Peter Yu for their insightful
comments on earlier drafts of this Article. I also thank Marquette University Law School
and Dean Joseph Kearney for research support, Patrice Childress and Natalie Sturicz
for research assistance, and the editorial board and staff of the American University
Law Review, and particularly Stephen LeBlanc and Kate Rakoczy, for their assistance
during the editing process of this Article.
**
341
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B. Toward a De Facto Abandonment of “Quality
Control”?.............................................................................387
V. The Case for Abandoning “Quality Control”...........................389
A. The Intrinsic Flaws of “Quality Control” ..........................390
B. The Need for a Better Rule on Modern Trademark
Licensing.............................................................................394
1. It is time to adopt licensing with or without “quality
control”..........................................................................396
2. Protecting consumers and the market under the
new rule .........................................................................400
Conclusion ...........................................................................................406
INTRODUCTION
Imagine that it is Monday morning and you are the managing
editor of your school’s law review. As every morning, you are seated
in the STARBUCKS coffee shop in front of your school reading the
newspaper while sipping your coffee from a STARBUCKS mug. Once
you are ready to leave, one of your classmates enters the shop wearing
a HARLEY-DAVIDSON T-shirt and a YANKEES hat. You greet her
and notice that she carries a backpack and a binder with the logo of
your university. Now imagine that you are back in your law review
office to work on the final draft of a new issue of the journal. Around
noon, you open a bottle of WESTLAW water and call the campus’
PIZZA HUT store with the office’s GE phone to order a grilled
vegetable pizza. In the afternoon, you leave the office and write a
note to the assistant managing editor on the LEXIS-NEXIS board
with instructions to ship the materials to the publisher. Finally,
imagine that some of your friends join you for a relaxing evening
watching a movie on your new SAMSUNG television. Since last
Saturday was your birthday, your friends bring a cake with the logo of
your favorite football team to celebrate and a new model of RALPH
LAUREN sunglasses as a gift.
2007]
THE SUNSET OF “QUALITY CONTROL”
343
1
These scenarios illustrate some examples of “trademark licensing,”
one of the most popular modern business practices, where
2
trademark owners authorize third parties to produce and distribute
products under their marks, usually in exchange for royalties.
Originally, trademark licensing was used for products that were
identical or directly related to those produced by trademark owners
to increase market production and save costs, like SAMSUNG
televisions or GE phones. In the past decades, however, this practice
has also been used with respect to unrelated products to establish
brand image in the market, like WESTLAW water or STARBUCKS
mugs. Without exaggeration, licensing today interests most products,
represents a significant source of revenue for many trademark
3
owners, and continues to grow in importance due to the changes in
product manufacturing, the internationalization of trade, and the
shift toward a service economy.
1. The Oxford American Desk Dictionary defines the term “license” as a
“permit or permission to own or use something, do something, or carry on a
business.” OXFORD AMERICAN DESK DICTIONARY 344 (1998). Black’s Law Dictionary
defines a “license” more narrowly as a “revocable permission to commit some act that
would otherwise be unlawful.” BLACK’S LAW DICTIONARY 743 (7th ed. 1999). In the
trademark context, licensing affords trademark owners the flexibility to grant an
exception to what would otherwise be infringing use by the licensee. See 2 JEROME
GILSON, TRADEMARK PROTECTION AND PRACTICE § 6.01[2] (1998) (“A trademark
license is a contractual arrangement whereby a trademark owner permits another to
use his trademark under circumstances where, but for the license, the other would
be a trademark infringer.”); 3 J. THOMAS MCCARTHY, MCCARTHY ON TRADEMARKS AND
UNFAIR COMPETITION § 18:1 (4th ed. 2007) (“[A] ‘license’ of a mark . . . is a limited
permit to another to use the mark . . . .”). This Article will use the terms “trademark
licensing” and “licensing” interchangeably. So too, “trademark licenses,” “licenses,”
and “licensing agreements” are used interchangeably.
2. A “trademark” is defined as “any word, name, symbol, or device . . . used . . .
to identify . . . goods and distinguish them from those manufactured or sold by
others” by section 45 of the Trademark (Lanham) Act of 1946, Pub. L. No. 79–489,
60 Stat. 427 (codified as amended at 15 U.S.C. §§ 1051–1141n (2000 & Supp. V
2005)). The Lanham Act defines a “service mark” similarly. See Lanham Act § 45, 15
U.S.C. § 1127. The words “trademark” and “mark” will be used interchangeably in
this Article. This Article will also use the words “trademark” and “mark” to refer to
any word and symbol protected under the Lanham Act.
3. See, e.g., RICHARD RAYSMAN ET AL., INTELLECTUAL PROPERTY LICENSING: FORMS
AND ANALYSIS § 4.08[2] (1999) (explaining the advantages of trademark licensing for
the licensor, including increased market presence and brand awareness); JOHN W.
SCHLICHER, LICENSING INTELLECTUAL PROPERTY: LEGAL, BUSINESS, AND MARKET
DYNAMICS 30–38 (1996) (detailing various legal and economic factors that affect the
profitability of trademark licensing); David J. Franklyn, The Apparent Manufacturer
Doctrine, Trademark Licensors and the Third Restatement of Torts, 49 CASE W. RES. L. REV.
671, 681 (1999) [hereinafter Franklyn, The Apparent Manufacturer Doctrine]
(recognizing that the explosion of American industry in the early 1900s gave rise to
the advantages of trademark licensing); W. J. Keating, Promotional Trademark
Licensing: A Concept Whose Time Has Come, 89 DICK. L. REV. 363, 363 (1985) (noting
that promotional trademark licensing has developed into a “substantial line of
commerce”).
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Considering this preeminent role of licensing, few people would
doubt the validity of this practice and the right of trademark owners
to license their marks as they see fit. Yet the history of trademark
4
licensing is a controversial one, at least in the United States.
Originally prohibited at common law and under the rule of the
Trademark Act of 1905 as a violation of the primary function of a
5
mark—to indicate the origin of the marked products —licensing was
recognized as a legal practice only with the adoption of the
6
The Lanham Act
Trademark Act of 1946 (“Lanham Act”).
specifically acknowledges that trademarks can be validly used by
7
“related companies.” Judicial decisions in previous years paved the
way for this shift, accepting that trademarks could indicate
commercial origin not only as actual product sources, but also in
terms of consumers’ expectations by guaranteeing that all products
bearing the same mark shared the same quality regardless of the
8
manufacturer. Yet, as a corollary to this principle, courts also
required that licensors guarantee a consistent product quality by
4. For a reconstruction of trademark history, see, for example, FRANK I.
SCHECHTER, THE HISTORICAL FOUNDATION OF THE LAW RELATING TO TRADEMARKS
(1925); see also Sidney A. Diamond, The Historical Development of Trademarks, 65
TRADEMARK REP. 265 (1975) (providing a historical overview of the marks used to
identify goods from antiquity through the middle ages); Benjamin G. Paster,
Trademarks—Their Early History, 59 TRADEMARK REP. 551, 552 (1969) (arguing that
increasingly complex trade and commerce necessitated the use of trademarks to
identify the producer of a product); Edward S. Rogers, Some Historical Matter
Concerning Trade-Marks, 9 MICH. L. REV. 29, 29 (1910–1911); Gerald Ruston, On the
Origin of Trademarks, 54 TRADEMARK REP. 127 (1955).
5. “Prior to passage of the Lanham Act many courts took the position that the
licensing of a trademark separately from the business in connection with which it
had been used worked an abandonment.” Dawn Donut Co. v. Hart’s Food Stores,
Inc., 267 F.2d 358, 367 (2d Cir. 1959); see Hanover Star Milling Co. v. Metcalf, 240
U.S. 403, 415 (1916), superseded by statute, Lanham Act § 22, Pub. L. No. 79–489, 60
Stat. 427, 435 (1946). For an overview of the emergence and acceptance of
trademark licensing, see Alfred M. Marks, Trademark Licensing—Towards a More
Flexible Standard, 78 TRADEMARK REP. 641, 645 (1988); Kevin Parks, “Naked” Is Not a
Four-Letter Word: Debunking the Myth of the “Quality Control Requirement” in Trademark
Licensing, 82 TRADEMARK REP. 531, 532 (1992).
6. 15 U.S.C. §§ 1051–1141n.
7. Lanham Act § 5, 15 U.S.C. § 1055. See 4A RUDOLF CALLMAN, CALLMAN ON
UNFAIR COMPETITION, TRADEMARKS AND MONOPOLIES § 26:24 (Louis Altman ed.,
Thomson/West 4th ed. 2006); 3 MCCARTHY, supra note 1, §§ 18:49–50.
8. See 3 MCCARTHY, supra note 1, § 18:55 (explaining that there is no
requirement that the products be of a specific quality, so long as the quality of the
products is consistent). See generally Elmer William Hanak, III, The Quality Assurance
Function of Trademarks, 43 FORDHAM L. REV. 363, 363–64 (1974) (suggesting that,
consistent with the traditional function of a mark as indicative of quality, consumers
rely on the mark as guaranteeing quality of the product across the board). In
contrast, Kevin Parks points to the origin of the “guaranty” function of trademarks
attributed to Frank Schechter and argues that this quality guarantee has been overly
inflated in subsequent scholarly discussions. Parks, supra note 5, at 533.
2007]
THE SUNSET OF “QUALITY CONTROL”
345
9
setting quality control requirements for licensees. Without such
control, courts considered licenses “naked” and trademark rights
forfeited based on the assumption that without this control, licensors
could not guarantee consistent product quality, and this would result
10
in consumer deception. While establishing this principle, however,
courts never elaborated on how much control was necessary for
licensors to satisfy the requirement and adopted a case-by-case
approach on the issue.
Following this judicial doctrine, quality control was introduced into
the Lanham Act as part of the definition of “related companies” and
has since represented the condition for valid licensing in the United
11
States.
Unfortunately, like the judiciary before its adoption, the
statute neither provided a definition of “quality” and “control” nor
indicated how much control must be used for licensing to be valid.
As a result, courts continued to interpret the requirement case by
12
case.
Not surprisingly, such an approach has often led to
contradictory decisions and uncertainty as to what constitutes a valid
13
license.
Generally, however, the decades that followed the enactment of the
Lanham Act were characterized by a growing judicial preference
9. 1 MCCARTHY, supra note 1, § 3:11 (“[I]t is clear that trademark law permits
the licensing of a mark under any circumstances where the licensor exercises quality
control over goods and services . . . .”).
10. See Dawn Donut, 267 F.2d at 366 (“[T]he Lanham Act places an affirmative
duty upon a licensor of a registered trademark to take reasonable measures to detect
and prevent misleading uses of his mark by his licensees or suffer cancellation of his
federal registration.”); see also 3 MCCARTHY, supra note 1, § 18:42 (suggesting that the
trademark owner does not merely have the right to control quality, but rather an
obligation to do so).
11. Lanham Act § 45, 15 U.S.C. § 1127.
12. See Creative Gifts, Inc. v. UFO, 235 F.3d 540, 548 (10th Cir. 2000); Exxon
Corp. v. Oxxford Clothes, 109 F.3d 1070, 1075–80 (5th Cir. 1997); Stanfield v.
Osborne Indus., 52 F.3d 867, 871–72 (10th Cir. 1995); Ky. Fried Chicken Corp. v.
Diversified Packaging Corp., 549 F.2d 368, 387 (5th Cir. 1977); Dawn Donut, 267 F.2d
at 367; Halo Mgmt., L.L.C. v. Interland, Inc., 308 F. Supp. 2d 1019, 1028–31 (N.D.
Cal. 2003); Westco Group, Inc. v. K.B. & Assocs., 128 F. Supp. 2d 1082, 1087–91
(N.D. Ohio 2001); Stanfield v. Osborne Indus., 949 P.2d 602 (Kan. 1997).
13. In addition to adopting inconsistent decisions with respect to licensing,
courts have traditionally adopted inconsistent decisions also with respect to
trademark assignments. In a previous article, Trademark Assignment “With Goodwill”:
A Concept Whose Time Has Gone, 57 FLA. L. REV. 771 (2005) [hereinafter Calboli,
Assignment “With Goodwill”], I advocated for the change of the current rule of
assignment “with goodwill” and proposed a new standard of assignment “with or
without goodwill” because of, inter alia, such inconsistency. See id. at 788. Due to the
similarity of some of the problems surrounding the two rules, some of the criticisms
upon which I base my arguments in this paper are similar to those previously
expressed in the context of trademark assignment. All arguments expressed in this
paper, however, are originally targeted to demonstrate the increasing
unsustainability of the current standard for the validity of licensing and to support
my proposal for a new standard allowing licensing “with or without control.”
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toward licensing, and courts rarely declared licenses invalid and
trademark rights forfeited. In particular, courts progressively relaxed
the interpretation of the control that licensors must exercise over
their licensees and held that first “adequate,” then “sufficient,” and
then “minimal” control was sufficient to fulfill the statutory
requirement. In some instances, courts also declared that evidence
of control was unnecessary as long as product quality remained
consistent and the public was not deceived. In addition to avoiding
the problem of assessing whether the existing control was
“sufficient”—a task difficult per se due to the ambiguity of this
concept—this approach better adapted to the business world, where
licensing with no or minimal control had long been a common
14
practice. As elaborated in this Article, this favorable attitude toward
licensing has continued until the present and in recent years the
courts have rarely interpreted quality control narrowly.
As expected, trademark owners and attorneys have welcomed this
trend as additional evidence supporting their claim against quality
15
Throughout the years, they often advocated for the
control.
elimination of quality control, arguing that the requirement does not
protect consumers and is generally used by competitors as a defense
16
17
against (often valid) claims of infringement. Trademark scholars,
however, have heavily opposed this judicial shift as “evidence that the
courts are leaning toward protecting trademarks in gross contrary to
18
the general principles of trademark law.” Still, whether welcoming
or opposing this judicial trend, neither party has provided a sufficient
explanation for it—are the courts abandoning quality control or are
19
they just interpreting the requirement “broadly”?
In addition,
neither party has evaluated how the ambiguities that still characterize
14. See Nathan Isaacs, Traffic in Trade–Symbols, 44 HARV. L. REV. 1210, 1210 (1931)
(noting that this has happened because of the “ignorance” of the law or by “making
the most of the exceptions” recognized by it).
15. See Calboli, Assignment “With Goodwill,” supra note 13, at 774–75; Parks, supra
note 5, at 531 (discussing whether there is a need for control in trademark
licensing); see also Elizabeth Cutter Bannon, Revisiting “The Rational Basis of Trademark
Protection”: Control of Quality and Dilution—Estranged Bedfellows?, 24 J. MARSHALL L.
REV. 65, 82–84 (1990) [hereinafter Bannon, Revisiting “The Rational Basis of Trademark
Protection”]; Neil J. Wilkof, Same Old Tricks or Something New? A View of Trade Mark
Licensing and Quality Control, 18 EUR. INTELL. PROP. REV. 261 (1996), reviewed in 87
TRADEMARK REP. 334 (1997); Michelle S. Friedman, Note, Naked Trademark Licenses in
Business Format Franchising: The Quality Control Requirement and the Role of Local Culture,
10 J. TECH. L. & POL’Y 353, 363 (2005).
16. See 3 MCCARTHY, supra note 1, § 18:38.
17. See, e.g., Mark A. Lemley, The Modern Lanham Act and the Death of Common
Sense, 108 YALE L.J. 1687, 1688 (1999).
18. Calboli, Assignment “With Goodwill,” supra note 13, at 775.
19. See id. at 774–75.
2007]
THE SUNSET OF “QUALITY CONTROL”
347
the definitions of “quality” and “control” are ultimately affecting the
application of the requirement in practice. These ambiguities
continue to represent the most important obstacle to a consistent
20
enforcement of quality control.
This Article addresses this void in the trademark debate and
provides a much needed analysis of licensing, the requirement of
“quality control” and the changes that have affected its application
21
since its implementation into trademark law.
Part I defines
licensing and the various types of licensing agreements that are
currently used in the market. Part II reconstructs the history of the
acceptance of this practice and the adoption of quality control as the
requirement for its validity. Part III considers the difficulties
encountered by the judiciary in assessing and defining “control” and
“quality,” and stresses the consequences of the lack of clear
definitions. Part IV highlights the increasing unsustainability of
quality control in today’s economy and offers evidence that modern
trademark practices are already shifting toward licensing de facto
without control.
Part V advocates for a more flexible approach to assessing the
validity of licensing, which will eliminate the inconsistencies resulting
from the erratic application of quality control. Part V argues that the
current requirement is failing to serve its purpose and suggests a
clear change toward licensing “with or without control,” where courts
should focus directly on the actual product quality. In particular, the
Article suggests that trademark licenses should be declared valid as
long as quality remains the same and the public is not deceived. In
addition, considering industrial reality, the Article proposes that
trademark licenses should be considered valid when product quality
is changed due to variations in product standards, marketing
20. See Parks, supra note 5, at 536–39.
21. This Article focuses its analysis of licensing on trademark law and, specifically,
the federal trademark statute and relevant judicial decisions. This Article does not
elaborate, however, on other aspects of licensing and, in particular, antitrust issues
and questions related to vertical restraints with respect to the concept of licensors”
control over their licensees. Generally, when a licensor exerts too much control over
its licensees, it can have anti-competitive effects that result in antitrust violation. See
Stephen P. Ladas, Trademark Licensing and the Antitrust Law, 63 TRADEMARK REP. 245,
257–59 (1973). “The question . . . is whether . . . restrictions are justified . . . or
whether they are . . . entered into with intent or effect of unduly restricting or
preventing competition.” Id. at 254. For an overview of antitrust aspects of licensing,
see Siegel v. Chicken Delight, Inc., 448 F.2d 43 (9th Cir. 1971); Tominaga v.
Shepherd, 682 F. Supp. 1489 (C.D. Cal. 1988); Ladas, supra; see also Robert E.
LeBlanc, Antitrust Ramifications of Trademark Licensing and Franchising, 53 TRADEMARK
REP. 519 (1963); Comment, Quality Control and the Antitrust Laws in Trademark
Licensing, 72 YALE L.J. 1171 (1973).
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strategies, or other reasons, as long as consumers are made aware and
are not deceived because of these changes.
I.
TRADEMARK LICENSING DEFINED
As it is commonly known, the core of trademark rights resides in
the ability of trademark owners to exclude unauthorized parties from
22
using similar marks on identical or confusingly similar products. A
corollary of this “right to exclude” is the ability of trademark owners
to authorize third parties to use their marks on a variety of products
23
under specific conditions. Usually, this authorization is granted by
contracts, which are defined as “trademark licensing agreements” or
24
Generally, these contracts can include a
“trademark licenses.”
variety of clauses or conditions such as exclusiveness, territorial
scope, advertising, product quality, and the percentage and
25
frequency of royalties owed to licensors.
As indicated earlier, trademark owners originally used licensing
agreements to outsource to third parties—licensees—the production,
in whole or in part, of the goods they used to produce under their
26
marks.
This practice, called “classical” or “traditional” licensing,
27
continues to be largely used today. This type of licensing happens
when companies like General Electric or Samsung, traditionally
manufacturers of home appliances, license their marks to one or
more producers of the same products who then manufacture and
22. Since trademark law theoretically does not protect trademarks in gross, the
general premise for the protection of trademark rights is that trademarks either are
in use or are intended to be in use. See Lanham Act § 1, 15 U.S.C. § 1051 (2000 &
Supp. V 2005); see also discussion infra Part II.A.
23. See Lanham Act §§ 5, 45, 15 U.S.C. §§ 1055, 1127.
24. For the definitions of “trademark licensing agreement” and “trademark
license,” see supra note 1.
25. See, e.g., ADAM L. BROOKMAN, TRADEMARK LAW: PROTECTION, ENFORCEMENT,
AND LICENSING § 12.02[A] (1999 & Supp. 2006) (providing examples of concepts that
are important in the creation of good licenses); NEIL J. WILKOF & DANIEL BURKITT,
TRADE MARK LICENSING 221–42 (2005).
26. See, e.g., David J. Franklyn, Toward a Coherent Theory of Strict Tort Liability for
Trademark Licensors, 72 S. CAL. L. REV. 1, 12 (1998) [hereinafter Franklyn, Liability for
Trademark Licensors]; Ira Levy et al., Advanced Trademark Licensing, 858 PLI/PAT 609,
613–22 (2006); Allison Sell McDade, Trading in Trademarks—Why the Anti-Assignment
In Gross Doctrine Should Be Abolished When Trademarks Are Used as Collateral, 77 TEX. L.
REV. 465, 485–86 (1998); see also E.I. du Pont de Nemours & Co. v. Celanese Corp. of
Am., 167 F.2d 484, 487–90 (C.C.P.A. 1948) (setting the early standard for a
traditional trademark licensing agreement); Arthur Murray, Inc. v. Horst, 110 F.
Supp. 678, 679–80 (D. Mass. 1953) (discussing the requirements of a traditional
licensing agreement).
27. See GREGORY J. BATTERSBY & CHARLES W. GRIMES, LICENSING DESK BOOK 3
(1999) (providing a general overview of the licensing industry); see also GREGORY J.
BATTERSBY & CHARLES W. GRIMES, LICENSING DESK BOOK:
2003 CUMULATIVE
SUPPLEMENT 3 (2003) [hereinafter BATTERSBY & GRIMES, 2003 SUPPLEMENT].
2007]
THE SUNSET OF “QUALITY CONTROL”
349
distribute home appliances under the GE or SAMSUNG marks.
Historically, this type of licensing has been justified on the basis that
licensees could manufacture the products more cheaply or effectively
28
due to their specialization, infrastructure, and economies of scale.
Today, this practice is also largely used internationally since many
companies outsource much of their manufacturing to foreign
29
countries.
Shortly after the enactment of the Lanham Act, a second type of
30
licensing developed and became known as “collateral” licensing.
Unlike traditional licensing, this practice usually interests different
goods and services even if the products continue to be related, in
type, kind, or market sector, to those “in connection with which the
31
public recognition and demand were first created.”
Collateral
licensing happens when companies like General Electric or Samsung,
which manufacture—directly or under traditional licensing—home
appliances but not home phones, license their marks to one or more
phone companies to produce and sell phones under the GE or
SAMSUNG marks. Here again, the rationale for collateral licensing
has generally been saving on manufacturing costs due to economies
of scale. In addition, this practice aims at creating and satisfying
consumer demand in areas that are collaterally related to those of the
32
products traditionally manufactured by trademark owners.
Finally, the past decades have witnessed an increasing use of a third
type of licensing, commonly known as “promotional trademark
33
licensing” or “trademark merchandising.”
A subset of collateral
licensing, trademark merchandising is generally used for products
28. See generally Ladas, supra note 21, at 252–53 (discussing the economic
foundations of trademark licensing).
29. See Jill Sarnoff Riola, Practical Strategies for Global Licensing, 7 J. PROPRIETARY
RTS. 11, 12–15 (1995) (examining the legal and business issues that commonly affect
international licensing); Eva Csiszar Goldman, Comment, International Trademark
Licensing Agreements: A Key to Future Technological Development, 16 CAL. W. INT’L L.J.
178, 178–80 (1986) (discussing the impact of international licensing on developing
nations).
30. Franklyn, Liability for Trademark Licensors, supra note 26, at 13.
31. See Marks, supra note 5, at 646.
32. See Ladas, supra note 21, at 252–53.
33. “Promotional trademark licensing” is defined as “commercial activity”
whereby “the consumer is more interested in identification with the trademark
owner than in the quality of the goods bearing the trademark.” Keating, supra note
3, at 363. “Trade-mark merchandising means merchandise that is extensively
advertised, and being extensively advertised, must live up to high quality.” Ely Lilly &
Co. v. Saunders, 4 S.E.2d 528, 533 (N.C. 1939), overruled by Bulova Watch Co. v.
Brand Distribs. of N. Wilkesboro, Inc., 206 S.E.2d 141 (N.C. 1974). This Article will
use the terms “promotional trademark licensing,” “promotional licensing,” and
“trademark merchandising,” interchangeably.
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34
that are unrelated to those originally bearing the licensed mark.
Examples of trademark merchandising are, inter alia, YANKEES hats,
35
WESTLAW water, and binders and backpacks with university logos.
Once again, the economic justification of this type of licensing is that
third parties can produce the items to which the mark is affixed more
cheaply and efficiently than trademark holders. Yet, rather than
indicating products’ commercial origins, the primary function of
merchandising is to increase the attractive function of the marks
themselves by providing consumers with a variety of items that, while
satisfying common needs, function as brand builders and allow the
36
public to identify with them. As this Article elaborates in Part IV,
this type of licensing has become increasingly predominant in most
sectors of the market today as an important source of revenues for
37
businesses. Hence, the rise of trademark merchandising has deeply
34. See, e.g., Boston Athletic Ass’n v. Sullivan, 867 F.2d 22, 32–35 (1st Cir. 1989);
Boston Prof’l Hockey Ass’n v. Dallas Cap & Emblem Mfg., 510 F.2d 1004, 1011–12
(5th Cir. 1975), cert. denied, 423 U.S. 868 (1975); Nat’l Football League Props., Inc. v.
Consumer Enters., Inc., 327 N.E.2d 242, 247 (Ill. App. 1975); see also Keating, supra
note 3, at 363; Marks, supra note 5, at 645–48. But see Stacey L. Dogan & Mark A.
Lemley, The Merchandising Right: Fragile Theory or Fait Accompli?, 54 EMORY L.J. 461,
478–95 (2005) (opposing both the theoretical and practical underpinnings of
trademark merchandising); Peter Jaffey, Merchandising and the Law of Trade Marks, 3
INTELL. PROP. Q. 240, 240–42 (1998) (criticizing the argument that merchandising is
deceptive without established merchandising rights through the trade mark system);
Veronica J. Cherniak, Comment, Ornamental Use of Trademarks: The Judicial
Development and Economic Implications of an Exclusive Merchandising Right, 69 TUL. L.
REV. 1311, 1315–16 (1995) (opposing a “merchandising monopoly” for trademark
owners).
35. See Franklyn, Liability for Trademark Licensors, supra note 26, at 14 n.53 (noting
that “[p]romotional trademark licensing mushroomed in the 1970s, led by ‘such
famous merchandising forerunners as BUSTER BROWN, RAGGEDY ANN, SHIRLEY
TEMPLE, BATMAN and ROBIN and MICKEY MOUSE’” (quoting Marks, supra note
5, at 646)).
36. See generally Dogan & Lemley, supra note 34, at 504 (stressing the problems
that are created in a competitive market when the mark itself is considered to be the
product); Alex Kozinski, Trademarks Unplugged, 68 N.Y.U. L. REV. 960, 961 (1993)
(highlighting the “growing tendency to use trademarks not just to identify products
but also to enhance or adorn them, even to create new commodities altogether”).
37. See generally Robert C. Denicola, Institutional Publicity Rights: An Analysis of
Merchandising of Famous Trade Symbols, 62 N.C. L. REV. 603, 604 (1984) (stressing how
consumers are willing to pay a higher price for products carrying their favorite
logos). As evidence of the growing importance of brands as sources of revenues,
Business Week has conducted a yearly ranking of the 100 top brands. In 2006, Coca
Cola, Microsoft, and IBM placed, respectively, first, second, and third in the ranking.
See David Kiley, Best Global Brands, BUS. WK., Aug. 7, 2006, at 54, available at
http://bwnt.businessweek.com/brand/2006/index.asp.
Companies
are
also
increasingly aware of the possibility of collecting revenues from strategic marketing
and increased brand value. See Intangible Business Brand Valuation: Licensing,
http://www.intangiblebusiness.com/Brand-Services/Marketing-Services/Licensing~
78.html (last visited Sept. 30, 2007) (“Brand licensing generates new revenue streams
and other commercial benefits for brands, with little direct cost. It is important,
however, to manage the system so licensing strengthens brand value.”).
2007]
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351
affected the traditional interpretation of licensing and fundamentally
38
challenged the applicability of quality control.
II. HISTORY OF TRADEMARK LICENSING AND “QUALITY CONTROL”
A practice scarcely used at the beginning of the twentieth century,
trademark licensing is used today in most sectors of the economy and
affects all types of products, as the examples above illustrate. Despite
its popularity, however, the validity of this practice is still the subject
of heated debates among scholars, judges, and practitioners almost
eighty years after its acceptance into trademark law.
Part II provides a detailed analysis of these debates while
reconstructing the history of the acceptance of licensing and the
conditions for its validity. Traditionally, the validity of this practice
has been construed upon the requirement that licensors control the
quality of the marked products to prevent variation in quality to the
detriment of consumers. Yet, until present, neither the courts nor
the statute have provided a definition of “quality control” or any
guidance as to how to interpret the requirement. As a result, the
application of quality control has often proven controversial in
practice and courts have applied the requirement inconsistently.
A. The Debate on Licensing and Trademark Protection
The acceptance of licensing and the conditions for its validity have
been at the center of the debate on trademark functions and
trademark protection since the first usage of this practice in the early
twentieth century. Generally, trademark owners advocated for no or
minimal restrictions on their ability to license their marks, arguing
that licensing could save costs, increase production, and provide
39
additional revenues for their businesses. Despite these arguments,
however, trademark law has historically construed the validity of
licensing based on the traditional rationale for trademark protection,
i.e., by focusing primarily on protecting consumers and market
40
In particular, courts and scholars have usually
competition.
38. See discussion infra Part IV.A.1.
39. Parks, supra note 5, at 558.
40. Trademarks have been protected over time because they inform individuals
about the products to which the marks are affixed, guarantee a predictable quality,
and reduce consumer costs of collecting information at the time of purchase. See
William M. Landes & Richard A. Posner, Trademark Law: An Economic Perspective, 30
J.L. & ECON. 265, 265–66 (1987) (“[T]rademark law . . . can be best explained on the
hypothesis that the law is trying to promote economic efficiency.”); see also Nicholas
Economides, The Economic Aspects of Trademarks, 78 TRADEMARK REP. 523, 525–27
(1988); William P. Kratzke, Normative Economic Analysis of Trademark Law, 21 MEM. ST.
U. L. REV. 199, 202–09 (1991).
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AMERICAN UNIVERSITY LAW REVIEW
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advocated against trademark owners’ ability to license their marks as
41
“things,” arguing that trademarks cannot be protected per se, but
only as conveyors of information about the products they identify and
42
as symbols of business goodwill.
Traditionally, these limits have been justified by considering the
social cost of trademarks, particularly the right of trademark owners
to exclude third parties from using identical or similar marks to
identify identical or similar products for a virtually unlimited period
43
of time. Notably, considering that marks are often common words
and symbols, protecting trademarks per se could amount to creating
a monopoly on language, a scarce and precious resource in the
44
business world. To prevent such unjustified monopoly, trademark
law has historically protected marks only within the limits of
protecting consumers against false information and protecting the
45
market against unfair competition.
As a direct result of this approach, trademark law has commonly
required that trademark owners control their licensees and the
quality of their products as sine qua non for the validity of licensing.
Without such control, it has been argued, product quality could be
affected and consumers could be confused. In addition, allowing
licenses without control would facilitate trademark owners’ trading in
their marks as “things,” thus limiting the availability of words and
symbols available as marks for competitors to identify similar
46
products.
Despite this traditional position, however, the argument that
trademarks can represent the most valuable assets of a business and,
accordingly, deserve absolute protection has always been part of the
41. See, e.g., Lemley, supra note 17, at 1687–88.
42. See discussion infra Part II.B.1.
43. Calboli, Assignment “With Goodwill,” supra note 13, at 777. For further
explanation of the basis, rationale, and limits for trademark protection, see generally
4 MCCARTHY, supra note 1, §§ 24–25.
44. See, e.g., GEORGE J. ALEXANDER, HONESTY AND COMPETITION 25–27 (1967);
EDWARD CHAMBERLIN, THE THEORY OF MONOPOLIST COMPETITION 218 (3d ed. 1938);
A.G. Papandrew, The Economic Effect of Trademarks, 44 CAL. L. REV. 503, 505 (1956).
45. S. REP. NO. 79-1333 (1946) introduces the Lanham Act as follows:
Trade-marks, indeed, are the essence of competition, because they make
possible a choice between competing articles by enabling the buyer to
distinguish one from the other. Trade-marks encourage the maintenance of
quality by securing to the producer the benefit of the good reputation which
excellence creates. To protect trade-marks, therefore, is to protect the
public from deceit, to foster fair competition, and to secure to the business
community the advantages of reputation and good will by preventing their
diversion from those who have created them to those who have not.
Id. at 4.
46. See discussion infra Part II.B.1.
2007]
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353
47
debate on the scope of trademark protection. Originally, common
law courts protected trademarks as property and based their
jurisdiction on protecting trademark owners from the invasion of
48
their property. Even though this interpretation was abandoned by
49
the courts in the first decades of the twentieth century and the
adoption of the Lanham Act in 1946 confirmed trademark protection
50
within the limits of public welfare, the temptation to protect
trademarks as property is always present in trademark law, and is
51
often evident in trademark practice.
In recent decades, this property-based approach to trademark
protection has been repeatedly revived both by courts and
47. See Frank I. Schechter, The Rational Basis of Trademark Protection, 40 HARV. L.
REV. 813, 818 (1927). By importing into the United States an idea originally
developed in Germany in the late 1800s, Schechter developed the doctrine of
“trademark dilution,” which is based upon the premise that trademarks often
constitute one of the primary assets of a business. According to Schechter, “[t]he
true functions of the trademark are, then, to identify a product as satisfactory and
thereby to stimulate further purchases by the consuming public.” Id.
48. The courts based this protection on natural rights, arguing that trademark
owners acquired the property of their marks through their possession and control.
For a detailed reconstruction of judicial decisions and the doctrinal discussion on
this point, see Edward S. Rogers, Comments on the Modern Law of Unfair Trade, 3 ILL. L.
REV. 551, 552–54 (1909), which provides a detailed list and analysis of the relevant
case law until the early 1900s. See also Daniel M. McClure, Trademarks and Unfair
Competition: A Critical History of Legal Thought, 69 TRADEMARK REP. 305, 314–16 (1978)
(summarizing the problems faced by the courts of equity in protecting trademarks
and the recourse to the concept of property). The Supreme Court referred to the
right to use a mark as “a property right” in The Trade-Mark Cases. 100 U.S. 82, 92
(1879).
49. See, e.g., McGraw-Hill Pub. Co. v. Am. Aviation Assocs., 117 F.2d 293, 297
(D.C. Cir. 1940). In this pre-Lanham Act decision, the court outlines methods for
assessing the scope of protection for a trademark that reflect concern for consumer
interests:
[T]he law of trade marks is for the market place. Its purpose is to protect
the several manufacturers in their respective spheres of public relations and
to safeguard the consumer by helping him get what he thinks he wants. The
method starts, therefore, with placing oneself in the position of a
purchaser. . . .
[Another method employed by the plaintiff includes
considering] probable confusion by submitting evidence that purports to
reveal disorder in the mind of the purchasing public.
Id. at 294–95.
50. See S. REP. NO. 79-1333, at 3–6 (1946):
The purpose underlying any trade-mark statute is twofold. One is to protect
the public so it may be confident that, in purchasing a product bearing a
particular trade-mark, which it favorably knows, it will get the product which
it asks for and wants to get. Secondly, where the owner of a trade-mark has
spent energy, time, and money in presenting to the public the product, he is
protected in his investment from its misappropriation by pirates and
cheats. . . . [S]ound public policy requires that trade-marks should receive
nationally the greatest protection that can be given them.
Id. at 3, 6.
51. See Frank H. Easterbrook, Intellectual Property is Still Property, 13 HARV. J.L. &
PUB. POL’Y 108, 118 (1990). According to Judge Easterbrook, “we should treat
intellectual and physical property identically in the law.” Id.
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AMERICAN UNIVERSITY LAW REVIEW
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legislatures. Courts have often decided trademark cases using
52
property theory, stating that impairing a mark can support
trademark protection without likelihood of confusion, particularly in
53
the case of famous marks.
In addition, Congress has frequently
amended federal trademark law, and all amendments have increased
54
the protection of the value of trademarks per se. As this Article will
demonstrate, this trend has influenced the traditional interpretation
of trademark licensing and, accordingly, has profoundly undermined
55
the sustainability of the quality control requirement.
B. The Rule of Licensing With “Quality Control”
Sections 5 and 45 of the Lanham Act set forth the current
conditions for the validity of trademark licensing. As indicated
earlier, licensing was customarily prohibited at common law and
under the Trademark Act of 1905 based on the assumption that if
licensed, a mark could no longer serve its function as an indicator of
56
origin, and consumers could be confused. Most likely as a result of
the changes in manufacturing and distribution that characterized the
early twentieth century, the Lanham Act took a different position and
legitimized this practice by acknowledging that a mark could be
52. See, e.g., K Mart Corp. v. Cartier, Inc., 485 U.S. 176, 185–86 (1988) (affirming
that trademark protection “like contract law, confers private rights”); San Francisco
Arts & Athletics, Inc. v. U.S. Olympic Comm., 483 U.S. 522, 532 (1987) (banning the
use of “Olympic” for “Gay Olympic Games” and arguing that an “entity
constitutionally may obtain a limited property right in the word” because of its
“organization and the expenditure of labor, skill, and money”); Krebs ChryslerPlymouth, Inc. v. Valley Motors, Inc., 141 F.3d 490, 498 (3d Cir. 1998) (recognizing
that “[t]rademarks are property” and belong to an estate in the case of bankruptcy);
Dallas Cowboys Cheerleaders, Inc. v. Pussycat Cinema, Ltd., 604 F.2d 200, 206 (2d
Cir. 1979) (denying First Amendment defense because of the “property right” nature
of the mark at issue).
53. See generally Lemley, supra note 17, at 1697–1700 (arguing that the judiciary
has increasingly expanded the rationale for trademark protection by considering
trademarks “as things owned in their own right, rather than as advertising connected
with a particular product”).
54. The most evident example of this trend has been the passing of the Federal
Trademark Dilution Act of 1995. Pub. L. No. 104-98, §§ 3(a), 4, 109 Stat. 985, 985–
86 (effective Jan. 26, 1996) (codified as amended at 15 U.S.C. §§ 1125, 1127 (2000)).
This Act directly protects famous marks against tarnishment and blurring, regardless
of any likelihood of confusion. This unnatural extension of trademark protection
has been criticized by many scholars. See, e.g., Kenneth L. Port, The “Unnatural”
Expansion of Trademark Rights: Is a Federal Dilution Statute Necessary?, 85 TRADEMARK
REP. 525, 552 (1995). Recently, the Supreme Court also attempted to limit the
extent of this Act and stated that, for dilution protection to apply, plaintiffs need to
show actual, not just a likelihood of, dilution. See Moseley v. V Secret Catalogue, Inc.,
537 U.S. 418, 433 (2003). In response to this case, the Federal Trademark Dilution
Act was amended in 2006 to reinstate the standard of likelihood of dilution. Pub. L.
No. 109-312 §§ 2, 3(e), 120 Stat. 1730, 1733 (effective Oct. 6, 2006).
55. See discussion infra Part IV.
56. See discussion infra Part II.B.2.
2007]
THE SUNSET OF “QUALITY CONTROL”
355
57
validly used by “related companies.”
Still, the statute carefully
crafted the conditions for the validity of licensing according to the
rationale of trademark law:
protecting consumers and fair
competition.
Specifically, section 5 of the Lanham Act states that
[w]here a registered mark or a mark sought to be registered is or
may be used legitimately by related companies, such use shall inure
to the benefit of the registrant or applicant for registration, and
such use shall not affect the validity of such mark or of its
registration, provided such mark is not used in such manner as to
58
deceive the public.
Section 45 clarifies the extent and limit of “such use” and defines a
“related company” as “any person whose use of a mark is controlled
by the owner of the mark with respect to the nature and quality of the
59
goods or services on or in connection with which the mark is used.”
According to the statute, the control exercised by trademark
owners over “the nature and quality” of the licensed products thus
represents the sine qua non for the validity of trademark licensing. As
elaborated below, this requirement was first established at common
law when the courts consistently affirmed that licenses without
control were invalid because they could lead to consumer
60
deception.
Neither sections 5 nor 45, however, expand on the
amount of control that is necessary for the validity of licensing or
define the meaning of “quality” and “control.” As criticized in Part
57. Lanham Act § 5, 15 U.S.C. § 1055 (2000).
58. Id. See RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 33 cmt. b (1995) (“If
the trademark owner exercises reasonable control over the nature and quality of the
licensee’s goods or services, the benefits of the licensee’s use accrue to the trademark
owner.”).
59. 15 U.S.C. § 1127 (2000). Originally, a “related company” was defined as “any
person who legitimately controls or is controlled by the registrant or applicant for
registration in respect to the nature and quality of the goods or services in
connection with which the mark is used.” Lanham Act § 45, Pub. L. No. 79-489, 60
Stat. 427, 443 (1946). This definition was amended in 1988 with the adoption of the
Trademark Law Revision Act. Pub. L. No. 100-667, 102 Stat. 3935, 3947 (1988). The
reason for this change was outlined in the following senate report:
The definition of “related company” is amended to delete the word
“legitimately” (the word’s presence in Section 5 of the Act avoids any
inference that use or control can be illegitimate), and to eliminate the
confusion that exists about whether a related company can control the
registrant or applicant as to the nature and quality of goods or services.
S. REP. NO. 100-515, at 44 (1988), as reprinted in 1988 U.S.C.C.A.N. 5577, 5606–67.
60. See discussion infra Part II.B.2. See generally 3 MCCARTHY, supra note 1, § 18:40
(suggesting that the modern view of trademark law and the permissibility of licensing
evolved from an emphasis on the source function of trademarks to a focus on
consumer reliance on trademarks as guarantors of the continuity of product quality).
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III, this lack of statutory guidance has given rise to much
61
inconsistency when assessing the validity of licensing in practice.
Following the approach previously adopted by the courts, the
Lanham Act also provides that lack of quality control can lead to the
forfeiture of trademark rights if consumers are misled. According to
section 14,
[a] petition to cancel a registration of a mark . . . may . . . be
filed . . . [a]t any time if the registered mark . . . is being used by, or
with the permission of, the registrant so as to misrepresent the
source of the goods or services on or in connection with which the
62
mark is used.
In addition to trademark cancellation, invalid licenses can also lead
to abandonment of the licensed mark. As indicated by Section 45,
“[w]hen any course of conduct of the owner, including acts of
omission as well as commission, causes the mark . . . to lose its
63
significance as a mark,” the mark is abandoned regardless of
64
Failure to
whether the owner intended to abandon the mark.
control their licenses reasonably can also render trademark owners
65
liable for false advertising under the Federal Trade Commission Act
when the licensees use the marks as instruments to defraud the
66
public.
Finally, the Lanham Act permits licensing of intent-to-use (“ITU”)
trademark applications in addition to marks that are already in use.
According to the second sentence of Section 5, which was introduced
into the original text of the provision as a result of the Trademark
67
Revision Act of 1988, “[i]f first use of a mark . . . is controlled by the
61. See discussion infra Part III.
62. Lanham Act § 14(3), 15 U.S.C. § 1064(3). See, e.g., Barcamerica Int’l USA
Trust v. Tyfield Imps., Inc., 289 F.3d 589, 597–98 (9th Cir. 2002); Stanfield v.
Osborne Indus., 52 F.3d 867, 871–72 (10th Cir. 1995).
63. Lanham Act § 45, 15 U.S.C. § 1127; see, e.g., Oberlin v. Marlin Am. Corp., 596
F.2d 1322, 1327 (7th Cir. 1979) (outlining requirement of supervision of trademark
licensees by licensor to avoid abandonment of trademark); Haymaker Sports, Inc. v.
Turian, 581 F.2d 257, 261–62 (C.C.P.A. 1978) (licensing of trademark without
control results in abandonment); Westco Group, Inc. v. K.B. & Assocs., 128 F. Supp.
2d 1082, 1086–91 (N.D. Ohio 2001) (asserting abandonment as a defense to breach
of license claim).
64. See, e.g., Barcamerica Int’l, 289 F.3d at 589 (holding that abandonment of
trademarks occurring when an owner fails to exercise adequate quality control over a
licensee is purely an involuntary forfeiture of trademark rights).
65. 15 U.S.C. §§ 41–77 (2000 & Supp. V 2005).
66. See discussion infra Part V.B.2; see also Scotch Whiskey Ass’n v. Barton
Distilling Co., 338 F. Supp. 595, 598 (N.D. Ill. 1971), aff’d in part, rev’d in part, 489
F.2d 809, 813 (7th Cir. 1973) (finding violation of Lanham Act § 43(a)); 3
MCCARTHY, supra note 1, § 18:48 (citing Waltham Watch Co. v. FTC, 318 F.2d 28, 29
(7th Cir. 1963), cert. denied, 375 U.S. 944 (1963) (finding Federal Trade Commission
Act violation)).
67. See Pub. L. No. 100-667, 102 Stat. 3935, 3938 (1988).
2007]
THE SUNSET OF “QUALITY CONTROL”
357
registrant or applicant for registration of the mark with respect to the
nature and quality of the goods or services, such first use shall inure
68
to the benefit of the registrant or applicant, as the case may be.”
Undoubtedly a sign of the increasing favor toward licensing, this
provision seems to represent the statutory foundation for
69
promotional licensing. Once again, however, the language of the
statute requires that trademark owners control the “nature and
70
quality” of the marked products even though the statute does not
specify how much control is necessary for a license to be valid.
1.
The rationale behind “quality control”
As indicated above, trademark licensing was not accepted as a
legitimate practice in trademark law until the adoption of the
Lanham Act, and even then, the practice has been strictly confined
within the limits of trademark protection. As I have previously noted
with respect to other aspects of trademark law, these limits rest on the
principles that trademarks are protected only as conveyors of
information about the products which they identify and as symbols of
71
commercial goodwill.
It was at common law that courts first formulated the principle that
trademarks are protected primarily because of their function of
informing the public. This principle replaced the previous majority
view—that trademarks were protected as property—and has
72
dominated trademark law ever since. As a fundamental implication
68. Lanham Act § 5, 15 U.S.C. § 1055 (2000).
69. Intent-to-use (“ITU”) applications are most often used for the licensing of
promotional products, such as HARLEY-DAVIDSON T-shirts, WESTLAW water, or
YANKEES hats, which are usually not directly related to the goods and services
manufactured or distributed by the trademark owners. For a discussion of
promotional licensing and merchandising, see infra Part IV.A.1.
70. According to the Lanham Act, licenses can be declared invalid and ITU
applications can be cancelled or declared abandoned as per Sections 14 and 45. See
Lanham Act §§ 14, 45, 15 U.S.C. §§ 1064, 1127. But see Sands, Taylor & Wood Co. v.
Quaker Oats Co., 978 F.2d 947, 958 (7th Cir. 1992) (attempting to license a mark is
evidence of intent to use and safeguards against abandonment), cert. denied, 507 U.S.
1042 (1993).
71. See Calboli, Assignment “With Goodwill,” supra note 13, at 781–84 (elaborating
on these principles to discuss the rationale of the rule on trademark assignment); see
also United Drug Co. v. Theodore Rectanus Co., 248 U.S. 90, 97 (1918). Here, the
Supreme Court stated that a trademark’s “function is simply to designate the goods
as the product of a particular trader and to protect his good will against the sale of
another’s product as his; and it is not the subject of property except in connection
with an existing business.” Id. For a discussion of the limits of trademark protection,
see generally 4 MCCARTHY, supra note 1, §§ 23:1–124.
72. See generally McClure, supra note 48, at 325–26. “The property justification of
protection was replaced by arguments in favor of protecting business good will or
values resulting from use. Protecting the public from confusion and deception
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AMERICAN UNIVERSITY LAW REVIEW
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of this principle, courts required that trademarks guarantee the
73
“continuity”—in terms of quality and characteristics —of marked
products. On the contrary, trademarks could provide inaccurate
information to the public, thus losing significance as distinctive
74
signs. This judicial approach, however, was not absolute as courts
often clarified that such “continuity” did not necessarily entail the
75
sale of identical products. Instead, courts generally reasoned that
76
“substantial similarity” was sufficient to guarantee such “continuity”
77
and protect the public against deception.
Yet, most likely to compensate for this shift away from protecting
trademarks as property, courts also developed the principle that
trademarks constituted symbols of commercial “goodwill” and that,
while trademarks could not enjoy direct protection, their goodwill
78
could be protected per se. As noted earlier, this principle was based
upon the consideration that protecting marks as property would
create a monopoly on language and symbols to the benefit of
79
trademark owners but to the detriment of the rest of society. In
became a more prominent rationale than protecting property.” Id. at 329 (footnote
omitted).
73. See, e.g., Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358, 360 (2d
Cir. 1959); Land O’Lakes Creameries, Inc. v. Oconomowoc Canning Co., 221 F.
Supp. 576, 581–82 (E.D. Wis. 1963), aff’d, 330 F.2d 667 (7th Cir. 1964).
74. See 1 MCCARTHY, supra note 1, § 3:2 (“Without the identification function
performed by trademarks, buyers would have no way of returning to buy products
that they have used and liked.”); see also Hanak, supra note 8, at 364 (“[A] consumer
wishes to match a trademark with what he likes and dislikes. If the origin of a
product is of concern to a consumer, it is only because the manufacturer’s products
have come to be associated with a certain level of quality.”).
75. This would prove unrealistic, particularly when changes in the features or
characteristics of a product are required by law or for marketing reasons. See
Franklyn, Liability for Trademark Licensors, supra note 26, at 15–16.
76. Id. Franklyn examines what he terms the “diverse quality” problem and the
attendant challenges of enforcing requirements of quality control when “quality”
remains variously defined from a standard of high, medium, or low quality or the
mere requirement of consistent quality. Id.
77. Calboli, Assignment “With Goodwill,” supra note 13, at 782–83.
78. Under the rule of the 1905 Act, Justice Holmes stated, “[a] trade-mark only
gives the right to prohibit the use of it so far as to protect the owner’s good will.”
Prestonettes, Inc. v. Coty, 264 U.S. 359, 368 (1924). See E.I. du Pont de Nemours
Powder Co. v. Masland, 244 U.S. 100, 102 (1917); 1 MCCARTHY, supra note 1, § 2:15
(“Good will of a business and its symbol, a trademark, are inseparable. Early in the
development of trademark law, the courts recognized that a trademark is ‘property’
only in the sense that it is a symbol of good will . . . .”).
79. See Avery & Sons v. Meikle & Co., 4 KY. L. RPTR. 759, 767 (1883).
The alphabet, English vocabulary and Arabic numerals are to man in
conveying his thoughts, feelings and the truth, what air, light and water are
to him in the enjoyment of his physical being. Neither can be taken from
him. They are the common property of mankind, in which all have an equal
share and character of interest. From these fountains whosoever will may
drink, but an exclusive right to do so can not be acquired by any.
Id.; see also Calboli, Assignment “With Goodwill,” supra note 13, at 782–83.
2007]
THE SUNSET OF “QUALITY CONTROL”
359
contrast, protecting solely their goodwill would protect fair
competition and prevent unscrupulous free riding, without impairing
societal use of common words and phrases.
As a result of these principles, particularly the position that
trademarks had to guarantee consistent product quality, the majority
of courts took the position that trademarks could not be licensed
80
freely but rather only under the control of their owners.
Such
control, the courts argued, provided a greater guarantee to the
public that product quality would be the same, or substantially the
same. In contrast, lack of control on the part of trademark owners,
i.e., naked licenses, could create a breach in product continuity that
could lead, in turn, to consumer confusion or deception if the public
continued to purchase the marked products while relying on
81
previous quality. Hence, to require that trademark owners control
the “nature and quality” of the licensed products as the standard for
the validity of licensing seemed to be the only effective way to avoid
82
the risk of defrauding the public.
Generally, from an economic standpoint, the quality control
requirement has also been justified based on the assumption that
changes in product quality resulting from uncontrolled licenses
83
could create market failures.
Even if consumers may sometimes
benefit from changes in quality, that is, when the quality of the
products is higher than expected, it has traditionally been affirmed
that these changes can result in increased consumer search costs,
thus frustrating the most important function of the mark—to
decrease consumer search costs by providing accurate information
84
about the origin and quality of the marked products. Additionally,
80. E.g., E.I. du Pont de Nemours & Co. v. Celanese Corp. of Am., 167 F.2d 484,
489 (C.C.P.A. 1948). “[A] license agreement, not merely a naked license to use,
where the licensor expressly reserves his right to continue the use of the mark and
which license agreement provides that the agreement may be terminated by the
licensor, is not an abandonment of its registered mark.” Id. at 487.
81. See F. Vern Lahart, Control—The Sine Qua Non of a Valid Trademark License, 50
TRADEMARK REP. 103, 107–09 (1960). An assurance of continuity of product quality is
necessary in licensing arrangements to preserve the trademark function of conveying
information to consumers and preventing confusion. See, e.g., PepsiCo, Inc. v.
Grapette Co., 416 F.2d 285, 288 (8th Cir. 1969) (“Inherent in the rules involving the
assignment of a trademark is the recognition of protection against consumer
deception.”).
82. See Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358, 367 (2d Cir.
1959) (“Clearly the only effective way to protect the public where a trademark is used
by licensees is to place on the licensor the affirmative duty of policing in a reasonable
manner the activities of his licensees.”).
83. E.g., James M. Treece, Trademark Licensing and Vertical Restraints in Franchising
Arrangements, 116 U. PA. L. REV. 435, 453–54 (1968).
84. WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF
INTELLECTUAL PROPERTY LAW, 166–68 (2003).
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these changes can thwart consumer expectation about the marked
85
products, regardless of their actual quality.
Scholars have also pointed out that without the quality control
requirement, unscrupulous licensors or licensees could change
86
product quality and take advantage of unwary consumers. Licensors
could be tempted, for example, to maximize revenues by asking
licensees to decrease product quality when facing difficulties in the
87
market, bankruptcy, or awareness that their marks have no future.
Similarly, licensees could decide to change product quality when they
face financial problems or because of other reasons. Although
licensees should also be interested in keeping a consistent product
quality, lest they risk losing customers, their lack of direct ownership
of the mark could make them less interested in the long-term success
88
of the products.
Accordingly, they could be more inclined to
increase short-term profits by decreasing product quality, to the
detriment of consumers, who could face unexpected drops in
product quality and likely be deceived when relying on the licensed
mark for their purchases.
2.
Evolution of the standard
As mentioned above, trademarks were originally viewed as serving a
single function: to identify the origin of the goods to which they were
89
affixed in terms of physical “source.” Under this interpretation, any
use of a mark on a product that did not come directly from its owner
90
Accordingly,
was seen as potentially confusing for consumers.
considering that licensing necessarily implied the outsourcing of
product manufacturing to third parties, the majority of the courts
85. Id. at 184–85.
86. Dawn Donut, 267 F.2d at 367. “The public is hardly in a position to uncover
deceptive uses of a trademark before they occur and will be at best slow to detect
them after they happen.” Id.
87. See Treece, supra note 83, at 453–54 (“A licensee . . . is somewhat more likely
than a mark owner to vary product quality, giving rise to a requirement that a mark
owner who chooses to license the use of his mark must eliminate this additional
increment of risk to the consumer by supervising his licensee.”).
88. LANDES & POSNER, supra note 84, at 184–85.
89. See discussion supra Part II.A.
90. See Am. Broad. Co. v. Wahl Co., 121 F.2d 412, 413 (2d Cir. 1941), superseded by
statute, Lanham Act § 5, Pub. L. No. 79-489, 60 Stat. 427, 429 (1946), as recognized in
Dawn Donut, 267 F.2d at 366–67; Everett O. Fisk & Co. v. Fisk Teachers’ Agency, Inc.,
3 F.2d 7, 8–9 (8th Cir. 1924), superseded by statute, Lanham Act § 5; Bulte v. Igleheart
Bros., 137 F. 492, 501–02 (7th Cir. 1905); Broeg v. Duchaine, 67 N.E.2d 466, 468
(Mass. 1946); see also Ralph S. Brown, Jr., Advertising and the Public Interest: Legal
Protection of Trade Symbols, 108 YALE L.J. 1619, 1638 (“If, by using A’s mark, B confuses
buyers who mean to buy from A and rely on the mark to denote A’s goods, A is
injured and can claim protection against the diversion of trade caused by B’s
appropriation.”).
2007]
THE SUNSET OF “QUALITY CONTROL”
361
91
initially saw this practice as “philosophically impossible” and thus
92
prohibited it.
This position officially continued until the adoption of the Lanham
Act in 1946. Yet a few courts decided to accept a broader
interpretation of the “source theory” and started to indirectly allow
93
licensing prior to the enactment of the statute. The Supreme Court
itself paved the way for this gradual acceptance of licensing when, in
94
1879, in Kidd v. Johnson, the Court ruled that the owner of a
trademark, who entered into a partnership and used a trademark for
the benefit of the partnership, did not need to transfer ownership of
95
the mark to the partnership. Although indirectly, the result of this
transaction was essentially a license and the Court allowed it to
96
stand. A few decades later, in the 1916 decision Hanover Star Milling
97
Co. v. Metcalf, the Court went further and held that a trademark was
not abandoned and could continue to serve its function as a mark
98
although it had been licensed.
Building upon these decisions,
several lower courts thus started to permit limited forms of licensing
99
in different factual situations.
By the end of the 1920s, this trend was irreversible. Licensing had
become an important part of the economy due to growing demand in
the market and surge in production, and courts were increasingly
91. See 3 MCCARTHY, supra note 1, § 18:39; see also Comment, supra note 21, at
1174.
92. E.g., MacMahan Pharm. Co. v. Denver Chem. Mfg. Co., 113 F. 468, 471–72
(8th Cir. 1901). “A trademark cannot be . . . licensed, except as incidental to a
transfer of the business or property in connection with which it has been used.” Id.
at 474–75.
93. See Hicks v. Anchor Packing Co., 16 F.2d 723, 725 (3d Cir. 1926) (noting that
in Section 7(c) of the 1918 Trading with the Enemy Act, Pub. L. No. 65-233, 40 Stat.
1020 (codified as amended at 50 U.S.C. app. § 7(c) (2000)), Congress authorized
seizure of enemy trademarks and their license to U.S. companies; the grant of such a
license did not create ownership of the mark in the licensee); Keebler Weyl Baking
Co. v. J. S. Ivins’ Son, Inc., 7 F. Supp. 211, 214 (E.D. Pa. 1934) (describing a
subsidiary licensing other subsidiaries of United Biscuit Co.); Nelson v. J. H. Winchell
& Co., 89 N.E. 180, 183–84 (Mass. 1909) (upholding the concept of a licensed right
to use as distinct from the right to use flowing from ownership); 3 MCCARTHY, supra
note 1, § 18:39 (citing Martha Washington Creamery Buttered Flour Co. v. Martien,
44 F. 473, 474–75 (E.D. Pa. 1890) (finding that when a trademark license is
terminated, continued use by the former licensee is an infringement of the rights of
the owner of the mark)).
94. 100 U.S. 617 (1879).
95. Id. at 619.
96. Id. at 620.
97. 240 U.S. 403 (1916), superseded by statute, Lanham Act § 22, Pub. L. No. 79489, 60 Stat. 427, 435 (1946).
98. See id. at 418–19 (setting forth that “trademark rights, like others that rest in
user, may be lost by abandonment”).
99. 3 MCCARTHY, supra note 1, § 18:39.
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100
inclined to uphold this practice.
As a result, courts and scholars
started to search for a legitimate way to justify licensing under
101
trademark law theory while still focusing on protecting consumers.
The solution to this quest was provided by a new interpretation of
trademark protection that brought about the acceptance of a second
trademark function in addition to that of indication of source: the
102
so-called “quality assurance” theory.
The seeds of this new trademark function had already been put
into place by the Supreme Court in 1883 in Manhattan Medical Co. v.
103
Wood, when Justice Field wrote that a mark “is both a sign of the
quality of the article and an assurance to the public that it is the
104
genuine product of his [the owner’s] manufacture.” Starting in the
1920s, courts and scholars elaborated on this principle and argued
that in modern society trademarks not only signified commercial
105
source but also represented symbols of product quality.
In other
words, trademarks were symbols of “uniformity or quality in the
106
products to which they [were] attached,” on which consumers
relied to guarantee that all products with the same mark shared the
same quality. To reconcile this “quality assurance” function with the
traditional “source theory,” courts and scholars expanded the
interpretation of the latter and argued that, rather than necessarily
indicating “actual” product source, trademarks represented product
source “at large,” that is, the source “controlling” the products
107
regardless of the actual manufacturer.
Under this new theory, licensing could thus be accepted since the
licensed marks continued to identify the “controlling source” of the
products. As a necessary corollary of this theory, however, the
judiciary started to require that trademark owners control their
100. Parks, supra note 5, at 533.
101. Id.
102. See 1 MCCARTHY, supra note 1, § 3:10 (recognizing a new concept that “a
trademark did not necessarily have to indicate only manufacturer or merchant
source, but could also serve to indicate a level of consistent quality”); see also Isaacs,
supra note 14, at 1215–16; Treece, supra note 83, at 445.
103. 108 U.S. 218 (1883).
104. Id. at 222–23.
105. Much of the credit for developing the trademark “quality assurance” theory
goes to Frank Schechter, who identified the primary function of a mark as a
“guaranty that the goods purchased under the trade-mark will have the same
meritorious qualities as those previously noted.” SCHECHTER, supra note 4, at 150.
106. Hanak, supra note 8, at 363.
107. In the early 1930s, trademarks were seen as fulfilling two different but
interrelated functions—indicating the source of the products in terms of “single
controlling source” and guaranteeing to the public that all products bearing the
same mark shared the same quality. 3 MCCARTHY, supra note 1, § 18:40.
2007]
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363
108
licensees to guarantee consistent product quality.
If, by contrast,
trademark owners failed to exercise such control, courts adopted the
position that the license was invalid because the mark could not
109
guarantee against changes in product quality, and this, in turn,
110
Yet, while they stressed the
could lead to consumer confusion.
importance of control, courts never elaborated on how much control
was adequate for licensing to be valid. Instead, arguing that it was
111
not possible to define control in the abstract, they left to individual
112
judges the task of deciphering control case by case.
The judiciary continued to follow the same line of reasoning after
113
the adoption of the Lanham Act.
Once again, the courts stressed
that “the only effective way to protect the public where a trademark is
used by licensees is to place on the licensor the affirmative duty of
114
policing in a reasonable manner the activities of his licensees.”
Otherwise, the concern was that “the public [would] be deprived of
its most effective protection against misleading uses of a
108. See, e.g., Comment, Trademark Licensing: The Problem of Adequate Control, 17
DUKE L.J. 875, 882 (1968); see also Mascaro v. Snelling & Snelling, Inc., 243 A.2d 1, 9
(Md. 1968), cert. denied, 393 U.S. 981 (1968). In a series of cases preceding the
Lanham Act, courts set forth the principle that licensing of a trademark apart from
the business to which it had been attached would result in an abandonment. See Am.
Broad. Co. v. Wahl Co., 121 F.2d 412, 413 (2d Cir. 1941) (“A trade-mark is intended
to identify the goods of the owner and to safeguard his good will. The designation if
employed by a person other than one whose business it serves to identify would be
misleading.”), superseded by statute, Lanham Act § 5, Pub. L. No. 79-489, 60 Stat. 427,
429 (1946), as recognized in Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358,
366–67 (2d Cir. 1959).
109. E.g., Atlas Beverage Co. v. Minneapolis Brewing Co., 113 F.2d 672, 677–78
(8th Cir. 1940); Dietz v. Horton Mfg. Co., 170 F. 865, 870–71 (6th Cir. 1909).
110. See, e.g., Bulte v. Igleheart Bros., 137 F. 492, 499 (7th Cir. 1905) (“[A] trademark or trade-name . . . gives assurance to a purchaser that the article upon which is
stamped the trade-mark or trade-name is the genuine production of the
manufacturer to whom the trade-name or trade-mark points by association as the
maker of the article.”).
111. Elizabeth C. Bannon, The Growing Risk of Self-Dilution, 82 TRADEMARK REP. 570,
575–79 (1992) [hereinafter Bannon, The Growing Risk of Self-Dilution].
112. E.g., Barcamerica Int’l USA Trust v. Tyfield Imps., Inc., 289 F.3d 589, 596–97
(9th Cir. 2002).
113. Lanham Act §§ 5, 45, 15 U.S.C. §§ 1055, 1127 (2000); see, e.g., Thomas Pride
Mills, Inc. v. Monsanto Co., 155 U.S.P.Q. (BNA) 205, 208 (N.D. Ga. 1967) (“The
primary functions of a trademark are to indicate a single source of origin of the
articles to which it refers and to offer assurance to ultimate consumers that articles so
labeled will conform to quality standards established and, when licensed to others,
controlled by the trademark proprietor.”).
114. Dawn Donut, 267 F.2d at 367; see Ky. Fried Chicken Corp. v. Diversified
Packaging Corp., 549 F.2d 368, 387 (5th Cir. 1977) (“If a trademark owner allows
licensees to depart from its quality standards, the public will be misled, and the
trademark will cease to have utility as an informational device.”); see also Haymaker
Sports, Inc. v. Turian, 581 F.2d 257, 261 (C.C.P.A. 1978) (“The purpose of such a
requirement is to protect the public from being misled.”).
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115
trademark,” and “the risk that [it] [would] be unwittingly deceived
116
Even after the enactment of the Lanham
[would] be increased.”
Act, however, courts did not elaborate on how to interpret “control”
or how much control had to be exercised by trademark owners.
Instead, this task was left, again, with individual judges as a factintense issue.
Not surprisingly, the result has been judicial
inconsistency.
III. PROBLEMS IN THE APPLICATION OF “QUALITY CONTROL”
Central to the interpretation of the quality control requirement are
the definitions of “control” and “quality,” and in particular what
represents “adequate control” and “consistent quality.”
As
highlighted above, traditionally it has proven difficult to provide clear
definitions of these terms in the abstract. This in turn has brought
the judiciary to define control and quality on a case-by-case basis. Not
surprisingly, such an approach has led to uncertainty as to how to
interpret the requirement and ultimately to judicial inconsistencies.
Part III explores these inconsistencies, focusing on the difficulty
encountered by the courts in defining quality control. Because of
this difficulty, courts have adopted an increasingly open-ended
interpretation of “control” and often focused more on product
quality—i.e., whether product quality remained the same—than on
the control exercised by trademark owners. Still, this approach has
profoundly eroded the practical impact of quality control while still
leaving many doubts as to what constitutes valid licensing.
A. Judicial Inconsistency in Defining “Quality Control”
With the exception of minor linguistic clarifications, Sections 5 and
45 of the Lanham Act have remained formally unchanged since the
117
enactment of the statute.
The interpretation of quality control,
however, has changed considerably in the past century, primarily due
to the growing role of licensing in the economy and the rise of
118
different types of licensing, such as merchandising. The changes in
interpreting the requirement have directly followed the variations in
the judicial interpretation of the concepts of “control of related
companies” and “product quality.” Still, these concepts are per se
115. Dawn Donut, 267 F.2d. at 367.
116. See id. (explaining that “this is precisely what the Act is in part designed to
prevent”).
117. See supra note 59 and accompanying text (discussing the change in definition
of the term “related company” in the Lanham Act).
118. See discussion infra Part IV.A.1.
2007]
THE SUNSET OF “QUALITY CONTROL”
365
ambiguous and, as indicated above, neither the courts nor the statute
119
As a result, courts
provide any guidance for their interpretation.
have historically defined them in a variety of ways, often reaching
120
contradictory interpretations.
In particular, prior to the enactment of the Lanham Act, courts
affirmed that licensing was valid as long as “such agreements [were]
121
not merely naked license agreements” and the mark remained
“associated with the same product or business with which it ha[d]
122
Thus, the critical inquiry
become associated in the public mind.”
for the validity of licensing under this premise was whether licensors
maintained control over product quality and, specifically, whether
123
licensees’ products “conform[ed] to any fixed standard.”
Courts
also held that once trademark owners had used and established a
mark “as a guaranty of the quality of [their] merchandise,” they could
124
not validly license it “to those who may sell an inferior product.”
Licensors were held responsible for strictly enforcing quality control,
and courts consistently found licenses without control invalid and
125
trademark rights forfeited.
Courts continued to require trademark owners’ control after the
enactment of the Lanham Act. Almost invariably, judicial decisions
in the 1940s and early 1950s included the customary language that
126
licenses without control were void.
Yet, during the same years,
several courts started to show an increasing willingness to uphold
licensing by adopting a broader interpretation of quality control.
Specifically, courts stated that “strict” control was not necessary and
119. See discussion supra Part II.B.
120. See Comment, supra note 108, at 894 (“[A]n examination of case law since the
Lanham Act reveals judicial approval of a wide spectrum of licensing agreements,
ranging from those involving detailed control provisions to those in which licensee
inspection is made at the licensee’s option.”).
121. See E.I. du Pont de Nemours & Co. v. Celanese Corp. of Am., 167 F.2d 484,
489 (C.C.P.A. 1948) (citing Menendez v. Holt, 128 U.S. 514, 524 (1888)). See
generally Bacardi Corp. of Am. v. Domenech, 311 U.S. 150 (1940); Saalfield Pub. Co.
v. G. & C. Merriam Co., 238 F. 1 (6th Cir. 1917); Mathy v. Republic Metalware Co., 35
App. D.C. 151 (D.C. Cir. 1910); Shaver v. Heller & Merz Co., 108 F. 821 (8th Cir.
1901).
122. E. F. Prichard Co. v. Consumers Brewing Co., 136 F.2d 512, 519 (6th Cir.
1943).
123. Broeg v. Duchaine, 67 N.E.2d 466, 468 (Mass. 1946) (stating that the license
at issue was not valid because it was not subject to any requirement that the licensee’s
products conform to fixed standards).
124. Id.
125. E.g., id. at 468–69; Detroit Creamery Co. v. Velvet Brand Ice Cream Co., 153
N.W. 664, 666 (Mich. 1915).
126. See Huber Baking Co. v. Stroehmann Bros., 252 F.2d 945, 952–53 (2d Cir.
1958); Arthur Murray, Inc. v. Horst, 110 F. Supp. 678, 679 (D. Mass. 1953) (“[T]he
trade-mark license is valid if ‘control’ by the licensor over the licensee exists.”).
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AMERICAN UNIVERSITY LAW REVIEW
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started to assess the validity of licensing based on “whether the
127
plaintiff sufficiently policed and inspected its licensees’ operations.”
128
They thus required licensors to exercise only “adequate” control.
Still, because of the case-by-case approach adopted in evaluating
agreements, the definition of what constituted “adequate” control
varied considerably, making it particularly challenging to predict
129
whether an agreement would be declared valid.
In addition to this uncertainty as to the required amount of
control, the decades following the adoption of the Lanham Act also
revealed conflicting decisions regarding the formality of including
quality control in licensing agreements. Under the traditional
approach, quality control provisions had to be part of the language of
the agreement for licensing to be valid. Yet, while many courts
130
continued to require this language to uphold the licenses at issue,
others decided to use a more flexible approach in this respect. In
particular, starting in the 1960s, a significant part of the judiciary
adopted the position that “actual” rather than contractual control was
sufficient to establish the validity of the licenses under their
131
scrutiny.
Courts could not agree, however, on a definition of
“actual” control and again defined it case by case, thus adding more
132
uncertainty to this area of the law.
Still, most likely because of the increasing role of licensing in the
economy, the majority of the courts continued to show a friendly
attitude toward this practice in subsequent decades and only rarely
133
did the judiciary interpret quality control conservatively.
Most
courts showed their “willingness . . . to leave no stone unturned in
134
and declared
finding evidence of sufficient quality control”
127. Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358, 367 (2d Cir. 1959).
128. E.g., id. at 369; Joseph Bancroft & Sons Co. v. Shelley Knitting Mills, Inc., 212
F. Supp. 715, 740 (E.D. Pa. 1962); Alligator Co. v. Robert Bruce, Inc., 176 F. Supp.
377, 378–79 (E.D. Pa. 1959).
129. E.g., Parks, supra note 5, at 557–61.
130. See, e.g., Societe Comptoir De L’Industrie Cotonniere Etablissements Boussac
v. Alexander’s Dep’t. Stores, Inc., 299 F.2d 33, 35 (2d Cir. 1962); Arthur Murray, 110
F. Supp. at 679–80 (finding the licensing agreement valid because it contained a
provision to control defendant’s methods of operation).
131. See infra Part III.A.1.
132. See Embedded Moments, Inc. v. Int’l Silver Co., 648 F. Supp. 187, 194
(E.D.N.Y. 1986) (holding that actual control is sufficient to prove adequate
regulation of a license and that contractual control is unnecessary); see also Bishops
Bay Founders Group, Inc. v. Bishops Bay Apts., 301 F. Supp. 2d 901, 909 (W.D. Wis.
2003) (“[A]n oral license may be sufficient if actual control is exercised by the
licensor.” (quoting 2 MCCARTHY, supra note 1, § 18:59)).
133. For an example of a conservative interpretation by the Trademark Trial and
Appeal Board, see Heaton Enterprises of Nevada, Inc. v. Lang. 7 U.S.P.Q.2d (BNA)
1842, 1847 (T.T.A.B. 1988).
134. Bannon, The Growing Risk of Self-Dilution, supra note 111, at 579.
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367
licensing valid as long as trademark owners exercised some control
135
Considering that findings of insufficient
over their licensees.
control could lead to forfeiture of the mark by involuntary
abandonment, courts consistently affirmed that claimants of naked
136
licenses “face[d] a stringent standard [of proof].”
In addition, in
some instances courts seemed willing to declare licensing valid, either
without focusing on licensor control or in the absence of control, as
137
long as product quality remained consistent.
For the most part, this favorable judicial approach toward licensing
has continued in recent years, and only occasionally has the lack of
138
adequate control brought the judiciary to declare licenses void.
Generally, courts have continued to recite that lack of control will
139
lead to naked licensing, yet they have found most licenses valid and
140
accepted almost any evidence of control to uphold licensing.
Courts have also repeated that minimal control can satisfy the quality
control requirement and that evidence of actual control is sufficient
141
to prove a license valid regardless of the contractual language.
Lastly, some courts have continued to uphold licensing “regardless of
control” as long as quality remains the same and the public is not
142
deceived.
Yet because of courts’ case-by-case approach and the
possibility that the agreement at issue will be assessed conservatively,
trademark owners, licensees, and the market are left with many
doubts as to what constitutes valid licensing.
135. E.g., Ky. Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d 368,
387–88 (5th Cir. 1977).
136. Taco Cabana Int’l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1121 (5th Cir.
1991) (citing Am. Foods, Inc. v. Golden Flake, Inc., 312 F.2d 619, 624–25 (5th Cir.
1963)), aff’d, 505 U.S. 763 (1992).
137. See id.; see also Hurricane Fence Co. v. A-1 Hurricane Fence Co., 468 F. Supp.
975, 987–89 (S.D. Ala. 1979).
138. E.g., Ritchie v. Williams, 395 F.3d 283, 290 (6th Cir. 2005); Barcamerica Int’l
USA Trust v. Tyfield Imps., Inc., 289 F.3d 589, 595–98 (9th Cir. 2002); Halo Mgmt.,
L.L.C. v. Interland, Inc., 308 F. Supp. 2d 1019, 1029–31 (N.D. Cal. 2004); Stanfield v.
Osborne Indus., 839 F. Supp. 1499, 1504–07 (D. Kan. 1993), aff’d, 52 F.3d 867 (10th
Cir. 1995). But see Westco Group, Inc. v. K. B. & Assocs., 128 F. Supp. 2d 1082, 1090–
91 (N.D. Ohio 2001).
139. See generally D. Peter Harvey, IP Maintenance: Protecting Intellectual Property
Assets Through Registration, Proper Use and Contractual Provisions, 709 PLI/PAT 33, 56–57
(2002) (noting that, because abandonment constitutes forfeiture of trademark,
courts hesitate to make such a finding).
140. E.g., Karen Marie Kitterman, Quality Control in Trademark Licensing, 821
PLI/PAT 509, 515 (2005).
141. E.g., Oberlin v. Marlin Am. Corp., 596 F.2d 1322, 1326–27 (7th Cir. 1979);
Heaton Distrib. Co. v. Union Tank Car Co., 387 F.2d 477, 482–85 (8th Cir. 1967);
Syntex Labs., Inc. v. Norwich Pharmacal Co., 315 F. Supp. 45, 56 (S.D.N.Y. 1970),
aff’d, 437 F.2d 566 (2d Cir. 1971).
142. See, e.g., Embedded Moments, Inc. v. Int’l Silver Co., 648 F. Supp. 187, 194
(E.D.N.Y. 1986) (“It is not necessary, however, for the licenses themselves to contain
a written provision for control; actual control by the licensor is sufficient.”).
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1.
The dilemma of “adequate” control
Soon after the adoption of the Lanham Act in 1946, courts started
drifting away from the position that, for licensing to be valid,
143
trademark owners had to enforce strict quality control.
Instead,
several courts adopted a broader interpretation and upheld licensing
agreements as long as trademark owners could prove that the control
144
they exercised was “adequate” to guarantee such quality.
Courts
never elaborated, however, a specific test to assess whether the
control used by licensors was in fact “adequate.” Rather, they
adopted a case-by-case analysis and assessed control based on how
145
licensors guaranteed product quality and whether the agreements
included quality control provisions. Hence, since decisions were
based upon the facts of individual cases, courts often reached
146
different positions on what constituted “adequate” control.
Still, despite these differences, the majority of the courts adopted
an increasingly favorable approach toward licensing starting in the
147
1950s. Notably, they declared most agreements valid and invariably
affirmed that claimants of naked licensing faced a stringent burden
148
In their attempt to uphold most licenses, courts also
of proof.
continued to relax the interpretation of quality control, and
specifically what constituted “adequate” control. Accordingly, several
courts affirmed that “adequate” could be interpreted as
149
“reasonable”
and that findings of “reasonable” control could
143. See discussion supra Part III.A.
144. E.g., Susser v. Carvel Corp., 206 F. Supp. 636, 641 (S.D.N.Y. 1962), aff’d, 332
F.2d 505 (2d Cir. 1964); Morse-Starrett Prods. Co. v. Steccone, 86 F. Supp. 796, 805
(N.D. Cal. 1949).
145. Traditional methods of controlling quality have included approval
requirements, regular testing procedures, requirements to buy certain supplies from
certain sources, and sending samples. See Arner v. Sharper Image Corp., 39
U.S.P.Q.2d (BNA) 1282, 1286–89 (C.D. Cal. 1995) (finding that licensing
agreements contained provisions that showed a reasonable inference of quality
control even though such control provisions were not explicitly spelled out);
Embedded Moments, 648 F. Supp. at 194–95 (holding that quality control was sufficient
when samples were sent to the licensor and the licensee consulted with the licensor
about manufacture); see also Karin Segall, Trademark Licensing: The Quality Control
Requirement; International Trademark Licensing Provision; Click Licenses, 775 PLI/PAT
353, 357–58 (2004) (explaining that the amount of control required, such as
policing, approval, or inspection depends on the type of good and potential
variability in quality).
146. Segall, supra note 145, at 357–58.
147. E.g., Susser, 206 F. Supp. at 641; Morse-Starrett, 86 F. Supp. at 805.
148. Doeblers’ Pa. Hybrids, Inc. v. Doebler, 442 F.3d 812, 823–25 (3d Cir. 2005);
Creative Gifts, Inc. v. UFO, 235 F.3d 540, 548 (10th Cir. 2000); U.S. Jaycees v. Phila.
Jaycees, 639 F.2d 134, 139 (3d Cir. 1981).
149. See generally Siegel v. Chicken Delight, Inc., 448 F.2d 43, 48–49 (9th Cir. 1971)
(finding that as long as the licensor exercises reasonable control over the product’s
quality, as opposed to maintaining control over specific component articles used in
operation and production, a license can be valid).
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THE SUNSET OF “QUALITY CONTROL”
369
150
dismiss claims of naked licensing.
Here again, definitions of
“reasonable” control varied case by case, but courts usually found that
trademark owners had used “reasonable” control. Then, part of the
judiciary lowered this threshold even further and interpreted
151
“adequate” as merely “sufficient.”
Again, what constituted
“sufficient” control was decided case by case, yet courts accepted
almost any evidence and even declared that a close working
relationship between licensors and licensees could prove “sufficient”
152
153
control or that such control could be exercised by third parties,
154
including licensees.
As part of this favorable trend, the judiciary also developed the
position that “actual” rather than contractual control could support
155
valid licensing.
This tendency to look outside the contractual
provisions to find indicia of control was first affirmed in 1959 in Dawn
156
Donut Co. v. Hart’s Food Stores, Inc., where the court held that the
language of the contract was not directly relevant to the validity of the
157
license as long as the licensor exercised actual control.
However,
the court clarified that in the absence of actual control,
abandonment could still be found even if the agreement contained
158
quality control provisions. Since then, this principle has commonly
been affirmed by the judiciary and, building upon it, some courts
have declared that, if actual control is present, an oral agreement can
159
also constitute valid licensing.
150. TMT N. Am., Inc. v. Magic Touch GmbH, 124 F.3d 876, 885–86 (7th Cir.
1997).
151. E.g., Susser, 206 F. Supp. at 641.
152. See Segall, supra note 145, at 360 (affirming that another instance in which
sufficient control may be achieved is a phase-out agreement that provides for quality
control). For an example where the court stated that phase-out agreements were not
per se abandonment, see Exxon Corp. v. Oxxford Clothes, Inc., 109 F.3d 1070, 1080 (5th
Cir. 1997).
153. See, e.g., Westco Group, Inc. v. K. B. & Assocs., 128 F. Supp. 2d 1082, 1091
(N.D. Ohio 2001) (finding that the licensor exerted enough control over the
licensee by monitoring operations through industry sources and sales
representatives).
154. See, e.g., Syntex Labs., Inc. v. Norwich Pharmacal Co., 315 F. Supp. 45, 56
(S.D.N.Y. 1970) (finding that the agreement at issue was valid based on the
relationship between the licensor and licensee and the fact that the licensee
complied with FDA regulations), aff’d, 437 F.2d 566 (2d Cir. 1971).
155. E.g., Embedded Moments, Inc. v. Int’l Silver Co., 648 F. Supp. 187, 194
(E.D.N.Y. 1986); Nat’l Lampoon, Inc. v. Am. Broad. Cos., 376 F. Supp. 733, 737
(S.D.N.Y. 1974), aff’d per curiam, 497 F.2d 1343 (2d Cir. 1974).
156. 267 F.2d 358, 368 (2d Cir. 1959).
157. Id. But see Robinson Co. v. Plastics Research & Dev. Corp., 264 F. Supp. 852,
864 (W.D. Ark. 1967) (holding that “it is the right to control rather than the actual
exercise of control which determines whether or not a license is valid”).
158. Dawn Donut, 267 F.2d at 368.
159. Transgo, Inc. v. Ajac Transmission Parts Corp., 768 F.2d 1001, 1017–18 (9th
Cir. 1985).
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Courts continued to lower the bar for what constituted “adequate”
control in the following decades. In particular, the judiciary stated
that “adequate” control was a very low standard and that even
160
“minimal” control was sufficient for a license to be valid.
This
approach was first elaborated in 1972 in Kentucky Fried Chicken Corp. v.
161
Diversified Packaging Corp., where the court found that the fact that
KFC failed to promptly discover that its licensees had purchased food
containers from unapproved sellers did not indicate lack of control
per se, since this requirement was included in the licensing
162
agreement. Following this decision, several courts continued to use
163
findings of “minimal” control to uphold licensing agreements.
They also affirmed the decision in Dawn Donut and repeated that
evidence of “actual” control was sufficient for valid licensing
164
regardless of the language of the actual agreement.
As highlighted earlier, this favorable attitude toward licensing has
continued until today. Present any sign of control, courts have
165
generally proven reluctant to declare licenses invalid, and only
occasionally have claims of inadequate control resulted in findings of
166
naked licensing.
Moreover, a minority of the courts have also
disagreed with Dawn Donut in recent years and stated that contractual
language providing for quality control constitutes sufficient evidence
167
of control even in the absence of actual control. This position was
160. Bureau Nat’l Interprofessionnel Du Cognac v. Int’l Better Drinks Corp., 6
U.S.P.Q.2d (BNA) 1610, 1617–18 (T.T.A.B. 1988); Penta Hotels Ltd. v. Penta Tours,
9 U.S.P.Q.2d (BNA) 1081, 1108–09 (D. Conn. 1988); Nestle Co. v. Nash-Finch Co., 4
U.S.P.Q.2d (BNA) 1085, 1089 (T.T.A.B. 1987); Embedded Moments, 648 F. Supp. 187 at
194.
161. 549 F.2d 368, 387 (5th Cir. 1977) (“Retention of a trademark requires only
minimal quality control, for in this context we do not sit to assess the quality of
products sold on the open market.”).
162. Id. at 386–88.
163. See, e.g., Hurricane Fence Co. v. A-1 Hurricane Fence Co., 468 F. Supp. 975,
989 (S.D. Ala. 1979) (“The plaintiffs have numerous licensed dealers throughout the
country and to impose upon the mark owner the duty of monitoring every sale of
every dealer to regulate its use of the mark would be unconscionable. . . . The
fencing business is unique and only minimal quality controls ought to be required.”).
164. E.g., Nat’l Lampoon, Inc. v. Am. Broad. Cos., 376 F. Supp. 733, 737 (S.D.N.Y.
1974), aff’d per curiam, 497 F.2d 1343 (2d Cir. 1974).
165. Lemley, supra note 17, at 1710–11. According to the Restatement (Third) of
Unfair Competition, the ultimate test should be “whether the control exercised by the
licensor is sufficient under the circumstances to satisfy the public’s expectation of
quality assurance arising from the presence of the trademark on the licensee’s goods
or services.” § 33 cmt. c (1995).
166. See Ritchie v. Williams, 395 F.3d 283, 290 (6th Cir. 2005); Barcamerica Int’l
USA Trust v. Tyfield Imps., Inc., 289 F.3d 589, 598 (9th Cir. 2002); Halo Mgmt.,
L.L.C. v. Interland, Inc., 308 F. Supp. 2d 1019, 1028–31 (N.D. Cal. 2004).
167. See 3 MCCARTHY, supra note 1, § 18:56 (citing Pike v. Ruby Foo’s Den, Inc.,
232 F.2d 683, 685–86 (D.C. Cir. 1956)); see also Ideal Toy Corp. v. Cameo Exclusive
Prods., Inc., 170 U.S.P.Q. (BNA) 596, 598 (T.T.A.B. 1971) (finding proper “control”
2007]
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371
168
highlighted most recently in 2003 in Glow Industries, Inc. v. Lopez,
where the court declared that “[t]he language of the agreement
demonstrate[d] that [defendant] maintained control over the quality
of the . . . products . . . and the burden thus shift[ed] to [plaintiff] to
169
demonstrate that [defendant] did not exercise that control.” This
approach represents a clear step toward licensing de facto without
control and as such has been criticized by supporters of quality
170
control.
Still, not all courts have subscribed to this trend, and
inadequate quality control, or lack thereof, continues to be a “risky
171
business” for trademark owners.
2.
Shifting focus on product quality?
Because of the ambiguities surrounding the concept of “control”
and, in particular, of what represents “adequate” control, the past
decades have also witnessed a shift in focus directly onto product
quality, rather than on control, to assess the validity of trademark
licensing. Rather than focusing on the control that licensors had
supposedly exercised over their licensees, several courts started to
look at whether the quality of the products was consistent—that is,
whether all products bearing the same mark in fact shared the same
quality so the public would not be deceived. If so, courts assumed that
licensors had exercised “sufficient” quality control.
This approach was first established in 1964 in Land O’Lakes
172
Creameries, Inc. v. Oconomowoc Canning Co.
In this case, the
petitioner claimed that the defendant engaged in naked licensing
173
and accordingly that its mark ought to be cancelled. However, the
court held that even if Oconomowoc Canning had not exercised
affirmative control on its licensee, the agreement was still valid
because the company had justifiably relied on its licensee to control
quality since the licensee had maintained consistent product quality
where licensor had a “right” to control, even though there was no evidence of actual
control); Robinson Co. v. Plastics Research & Dev. Corp., 264 F. Supp. 852, 864
(W.D. Ark. 1967); Arthur Murray, Inc. v. Horst, 110 F. Supp. 678, 680 (D. Mass.
1953); Wolfies Rest., Inc. v. Lincoln Rest. Corp., 143 U.S.P.Q. (BNA) 310, 310–11
(N.Y. Sup. Ct. 1964)).
168. 273 F. Supp. 2d 1095 (C.D. Cal. 2003).
169. Id. at 1111.
170. Such an approach has been criticized as a breach in rationale of the quality
control requirement. Bannon, The Growing Risk of Self-Dilution, supra note 111, at 579.
171. See 3 MCCARTHY, supra note 1, § 18:10 (discussing the rule against trademark
assignment in gross).
172. 330 F.2d 667 (7th Cir. 1964).
173. Id. at 668.
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174
for more than forty years of their licensing relationship. Still, from
a theoretical standpoint, the court continued to affirm that licensors
have an affirmative duty to police their licensees, but that this was not
175
necessary in the case at issue because of the circumstances.
In subsequent years, several courts followed this decision and held
that evidence of control was not strictly necessary to uphold
176
trademark licenses as long as product quality was consistent.
Two
circuit court decisions from 1985 proved particularly interesting in
177
this respect: Transgo, Inc. v. Ajac Transmission Parts Corp. and Taco
178
Cabana International, Inc. v. Two Pesos, Inc.
In Transgo, the court
upheld the license at issue because the licensor and licensee worked
closely together for ten years, and even though the licensor did not
inspect the final products, quality was deemed to have been
179
adequately controlled by the licensee. Similarly, in Taco Cabana the
court upheld the agreement at issue based on the close working
180
relationship between the licensors and licensees.
In this case, two
brothers jointly operated a restaurant. When one later opened a
similar restaurant under a licensing agreement, the court found the
license valid, despite the lack of a quality control provision, on the
assumption that, after working together for eight years, the brothers
could reasonably rely on each other to maintain consistent product
181
quality.
182
183
Still, like the court in Land O’Lakes, the courts in Transgo and
184
Taco Cabana did not dismiss the theoretical need for control as a
condition for valid licensing. Instead, they focused on product
quality and whether the public was deceived to assess and eventually
uphold the agreements at issue. In particular, in Taco Cabana, the
court stated that “[t]he purpose of the quality-control requirement is
to prevent the public deception that would ensue from variant quality
174. See id. “The controversy here must be viewed in light of the innocence of
each party in adopting the same trade-mark, the length of time the parties have used
the mark, and the noncompetitive nature of their products.”
Id. at 671.
Theoretically, the court did not dismiss the need for quality control, but the result of
this license was a de facto upholding of a naked license.
175. Id. at 670–71.
176. E.g., Haymaker Sports, Inc. v. Turian, 581 F.2d 257, 262 (C.C.P.A. 1978);
Embedded Moments, Inc. v. Int’l Silver Co., 648 F. Supp. 187, 194 (E.D.N.Y. 1986).
177. 768 F.2d 1001 (9th Cir. 1985).
178. 932 F.2d 1113 (5th Cir. 1991), aff’d, 505 U.S. 763 (1992).
179. Transgo, 768 F.2d at 1017–18.
180. Taco Cabana, 932 F.2d at 1113, 1121.
181. Id. at 1121–22.
182. 330 F.2d 667 (7th Cir. 1964).
183. 768 F.2d at 1017.
184. 932 F.2d at 1121.
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THE SUNSET OF “QUALITY CONTROL”
373
185
standards”
and “[w]here the particular circumstances of the
licensing arrangement persuade us that the public will not be
deceived, we need not elevate form over substance and require the
186
same policing rigor appropriate to more formal licensing.”
In
addition, the court specified that, where it “may justifiably rely on
each parties’ . . . standards and procedures to ensure consistent
quality, and no actual decline in quality standards is demonstrated, [it]
would depart from the purpose of the law to find an abandonment
187
simply for want of all the inspection and control formalities.”
This tendency to uphold licensing “regardless of actual control”
188
where product quality remains consistent has grown in recent years.
In particular, an increasing number of courts have adopted the
189
approach, first affirmed in Kentucky Fried Chicken,
that “the
consuming public must be the judge of whether the quality control
190
efforts have been ineffectual,” thus shifting the analysis of the
validity of licensing from quality control to consistent product quality.
Still, no court has openly defied the theoretical validity of quality
191
control or rejected the requirement so far.
Instead, the judiciary
has adopted a compromise in the form of a broad definition of
control—that control can be implied as long as product quality is
consistent and the public is not misled—to “skip” the analysis of
quality control and either uphold agreements or declare them void.
Yet, despite its clear advantage over the traditional approach—
avoiding the daunting task of defining control while focusing on the
reality of the agreements—this trend has continued to be based on a
case-by-case analysis rather than on a clear change in the traditional
standard. In addition, as with “adequate control,” courts have never
defined what constitutes “consistent quality.” Accordingly, in the
192
absence of any statutory guideline on the matter, judicial positions
185. Id.
186. Id.
187. Id. (emphasis added).
188. See, e.g., Embedded Moments, Inc. v. Int’l Silver Co., 648 F. Supp. 187, 194
(E.D.N.Y. 1986) (“It is not necessary, however, for the licenses themselves to contain
a written provision for control; actual control by the licensor is sufficient.”).
189. 549 F.2d 368 (5th Cir. 1977).
190. Id. at 387.
191. Bach v. Forever Living Prods. U.S., Inc., 473 F. Supp. 2d 1110 (W.D. Wash.
2007). “The general rule is that a trademark owner who ‘fails to exercise adequate
quality control over [a] licensee’ of a trademark creates a ‘naked license’ and
thereby abandons the trademark.” Id. at 1120 (citation omitted). See Dep’t. of Parks
& Recreation v. Bazaar Del Mundo, Inc., 448 F.3d 1118, 1131 (9th Cir. 2006)
(“[W]ell-established trademark law imposes a duty upon the licensor to retain
sufficient control over the mark to prevent public deception.”).
192. See generally Franklyn, The Apparent Manufacturer Doctrine, supra note 3, at 686
(highlighting that “[n]either ‘quality’ nor ‘control’ is defined in the Lanham Act;
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in this respect are also likely to vary, thus creating further
193
Finally, this trend away from the enforcement of
inconsistency.
quality control has not been universally accepted and some courts
have continued to assess agreements conservatively, thus leaving
licensors, licensees, and competitors uncertain as to how to structure
194
a valid license.
B. Consequences of the Absence of a Clear Definition of “Quality Control”
As stressed earlier, the uncertainty surrounding the definition of
quality control created much ambiguity in its judicial application. In
particular, courts often interpreted the requirement as they saw fit
and stretched the concept of “control”—a concept per se open
ended—to include any type of control, from “strict” to “adequate,” to
“sufficient,” and eventually to “minimal” control. Courts also used
criteria such as consistent product quality or a close working
relationship between the licensors and licensees to affirm that control
could be “implied.” Yet, while the judiciary generally favored
licensing and found traces of control in most agreements, courts have
never followed a totally consistent path on the issue and have
continued to randomly adopt a more conservative approach in recent
195
years.
As a result, much ambiguity continues to exist today as to what
constitutes a valid license and how much control trademark owners
should exercise to avoid the involuntary forfeiture of their marks.
Accordingly, licensors are commonly advised to use caution and
include explicit quality control provisions in their contracts in
addition to exercising actual control over their licensees to avoid
196
findings of naked licensing.
Still, the degree of control that
licensors ought to adopt remains uncertain in practice and often
varies according to the circumstances of the individual cases and the
they are common law creatures whose evolution is incomplete and inconsistent”)
(citation omitted).
193. See Nitro Leisure Prods., L.L.C. v. Acushnet Co., 341 F.3d 1356, 1370 (Fed.
Cir. 2003) (stating that consistent quality means the product is of “‘the same
character and source . . . as other goods previously purchased bearing the mark’”
(quoting 1 MCCARTHY, supra note 1, § 3:10)); Taco Cabana Int’l, Inc. v. Two Pesos,
Inc., 932 F.2d 1113, 1121 (5th Cir. 1991) (indicating that consistent quality means
“no actual decline in quality standards”), aff’d, 505 U.S. 763 (1992); Gorenstein
Enters., Inc. v. Quality Care-USA, Inc., 874 F.2d 431, 435 (7th Cir. 1989) (stating that
consistent quality means the product “really is the same good or service”).
194. E.g., Parks, supra note 5, at 531.
195. See discussion supra Part III.A.1–2.
196. E.g., Ann E. Doll, Trademark Licensing: Quality Control, 12 J. CONTEMP. LEGAL
ISSUES 203 (2001).
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THE SUNSET OF “QUALITY CONTROL”
375
197
view of the individual court.
For example, while some courts may
be appeased by the consistent quality of licensed products, others
may require evidence of actual, and even strict, control to avoid a
198
finding of naked licensing. Furthermore, since part of the judiciary
has indicated that third parties or even licensees can effectively
monitor quality control, licensors face confusion as to who should
monitor quality control—that is, whether they must exercise control
199
directly—for licensing to be valid.
Besides creating many problems for trademark owners and
licensees with respect to the drafting and enforcing of their licenses,
the ambiguity surrounding the interpretation of quality control has
also allowed unfair competitors to present claims of invalid licensing
as a defense against accusations of trademark infringement, arguing
that trademark owners forfeit their rights as a result of insufficient
200
quality control.
Not surprisingly, this trend has increased the
number of unnecessary and frivolous lawsuits to the detriment of the
201
judicial system and the market overall.
Here again, to avoid
counterclaims of naked licensing in response to infringement claims,
trademark owners are usually advised to be cautious and enforce
quality control beyond what would normally be sufficient. Yet, while
this approach undoubtedly serves the purpose of proving the validity
of the agreement at issue, it also comes with increased costs for
trademark owners which, in many instances, are eventually
transferred to the final prices of products, and thus directly affect
202
consumers and the market.
Most likely in order to prevent this cost shifting and as a result of
the growing importance of licensing, the judiciary has drifted away
197. See id. at 205 (“How much control must the licensor exercise to assure
consumers and to protect against mark abandonment? The courts do not provide
specific answers . . . .”); see also Dep’t. of Parks & Recreation v. Bazaar Del Mundo,
Inc., 448 F.3d 1118, 1131 (9th Cir. 2006) (requiring “sufficient control”); Doebler’s
Pa. Hybrids, Inc. v. Doebler, 442 F.3d 812, 823 (3d Cir. 2006) (requiring that
licensors use “adequate control”); Bishops Bay Founders Group, Inc. v. Bishops Bay
Apts., 301 F. Supp. 2d 901, 909 (W.D. Wis. 2003) (requiring “actual control”).
198. E.g., Ritchie v. Williams, 395 F.3d 283, 290 (6th Cir. 2005); Barcamerica Int’l
USA Trust v. Tyfield Imps., Inc., 289 F.3d 589, 596 (9th Cir. 2002); Halo Mgmt.,
L.L.C. v. Interland, Inc., 308 F. Supp. 2d 1019, 1028–30 (N.D. Cal. 2003); Stanfield v.
Osborne Indus., 839 F. Supp. 1499, 1504–05 (D. Kan. 1993).
199. See Richard M. Steuer, Exclusive Dealing in Distribution, 69 CORNELL L. REV. 101,
132 (1983) (“Federal law requires a trademark owner that licenses its trademark to
exercise control over the quality of the trademarked goods produced and distributed
by its licensees.”).
200. See discussion infra Part V.B.2.
201. See Parks, supra note 5, at 531. See also William R. Woodward, Some
Observations on Legitimate Control of the Nature and Quality of the Goods, 49 TRADEMARK
REP. 609 (1959) (criticizing the quality control requirement).
202. See discussion infra Part V.B.
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from the strict interpretation of quality control to a more flexible
203
Specifically, as
approach since the adoption of the Lanham Act.
detailed in the previous paragraphs, the majority of the courts have
increasingly adopted a sort of rule of reason and a broad
interpretation of “control” to assess licenses based on their possible
204
effects on consumers and the market.
As a result, courts have
accepted that “sufficient” or even “minimal” control could satisfy the
quality control requirement, and a growing number of judges have
decided to focus on the substance and the result of the agreements,
that is, the consistency of product quality, rather than on actual
205
control.
Despite this growing trend, the traditional view that lack of control
will result in naked licensing has nonetheless continued to be
included in the language of most judicial decisions, proving courts
generally reluctant to abandon quality control as the theoretical
206
standard for valid licensing. Still, instead of assisting the courts in
preventing fraudulent licensing and protecting consumers and the
market from such fraud, this adherence to the traditional theoretical
framework of licensing has increased the existing confusion by
leaving room for courts to interpret quality control as they see fit
based on the circumstances of the individual case. Ultimately, this
lack of a clear direction as to what constitutes a valid license
continues to permit attacks among competitors, often regardless of
consumer confusion, thus undermining the original goal of the
requirement—protecting product quality and the purchasing
207
public.
IV. THE INCREASING UNSUSTAINABILITY OF “QUALITY CONTROL”
In the last hundred years, trademark licensing has become a vastly
more important and lucrative tool for businesses. As elaborated in
Part I, modern licensing has also extended to nontraditional
agreements such as collateral and promotional licensing, whose
primary functions differ considerably from that of classical licensing,
203. See discussion supra Part III.A.1–2.
204. See Doebler’s Pa. Hybrids, Inc. v. Doebler, 442 F.3d 812, 824–25 (3d Cir.
2006) (requiring “reasonable” control).
205. See 3 MCCARTHY, supra note 1, § 18:58 (“[S]ome courts are reluctant to
interfere with reasonable quality control arrangements agreed to by the parties and
will often accept even minimal control . . . .”).
206. See supra Part II.A.
207. See University of Pittsburgh v. Champion Products, Inc., 686 F.2d 1040, 1047 (3d
Cir. 1982), and Ryan v. Volpone Stamp Co., 107 F. Supp. 2d 369, 380 (S.D.N.Y. 2000),
for examples of cases where the court found no consumer confusion and upheld the
agreements at issue.
2007]
THE SUNSET OF “QUALITY CONTROL”
377
i.e., enhancing and exploiting the value of a mark per se. Still,
trademark law continues to subject all types of licensing to the same
validity requirement that was used in the early twentieth century for
classical licensing—quality control.
Part IV considers the changes that have affected modern
trademark licensing and the increasing unsustainability of quality
control. This Part also highlights how modern trademark practices
are increasingly shifting toward licensing de facto without control.
This shift is particularly apparent when one considers practices such
as promotional licensing, trademark assignment and license-back,
and the doctrine of licensee estoppel. Considering that most foreign
countries do not require quality control for valid licensing, this shift
can also be attributed to the proliferation of international licensing
and the growing importance of international trade.
A. The Reality of Modern Trademark Licensing
As indicated in Part I, the origin of trademark licensing can be
traced back to the desire of trademark owners to increase the
production of their existing products or to manufacture affiliated
208
goods. Rather than increasing production or directly starting new
manufacturing, however, trademark owners often found it more
convenient to delegate this task to third parties, who specialized in
the same field, through licensing agreements. In addition to
avoiding the costs and the risks of manufacturing, these agreements
seemed more economical since licensees manufactured products
more cheaply due to economies of scale and trademark owners still
209
enjoyed a share of profits due to royalties.
On their part, such
arrangements also suited licensees, who often seek them directly to
take advantage of the goodwill established by the licensed mark and
thus avoid the risks connected to selling products independently
210
under a new and unknown name.
In its essence, the above rationale has continued to characterize
trademark licensing until present, and both licensors and licensees
continue to enter agreements to save costs and increase their profits
211
by exploiting the goodwill established by the licensed marks. Since
208. See discussion supra Part I.
209. E.g., SCHLICHER, supra note 3, at 27.
210. Id.
211. See Parks, supra note 5, at 533–35 (discussing the various theories that have
justified trademark licensing over the years and suggesting the introduction of a new
theory, different from “quality assurance”); see also Friedman, supra note 15, at 357
(discussing quality assurance theory as a justification for trademark licensing (citing
Schechter, supra note 47, at 823)).
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its early days, however, trademark licensing has profoundly evolved.
In particular, from an occasional business technique, licensing has
become a fundamental pillar of the economy due to the changes in
manufacturing, the rise of the consumer society, and the
212
globalization of trade. Because of these changes, licensing has also
developed into several types of agreements whose objectives are often
213
different in scope from those of classical licensing.
Notably, modern trademark licensing has expanded beyond the
production of the same or similar products to encompass a growing
number of collateral and promotional products whose primary intent
is that of enhancing, and exploiting, the image of the brand
214
As critics have often pointed out, this
embodied by a mark.
increasing focus on trademarks as stand-alone business assets is
additional evidence of the modern shift toward “propertizing”
215
trademark rights. Still, well aware of the importance of trademarks
as a source of revenues for businesses, particularly in an economy
that is increasingly moving toward a service economy, both the courts
and legislators have proven willing to support this shift as long as the
public is not confused or misled and competition in the market
216
continues to be fair.
Similarly, recent decades have also witnessed the growth of a
217
practice closely related to licensing—franchising. Primarily used in
the service and retail areas, franchising usually involves the licensing
of famous marks along with the licensors’ technology and methods of
operation. Here again, however, the primary reason for this practice,
both on the part of the franchisor and franchisee, is almost always the
desire to exploit the fame and established goodwill of the licensed
212. E.g., BATTERSBY & GRIMES, 2003 SUPPLEMENT, supra note 27, at 3.
213. The Lanham Act does not differentiate between types of licensing and
applies quality control as a requirement for the validity of all agreements. Lanham
Act § 5, 15 U.S.C. § 1055 (2000).
214. See discussion infra Part IV.A.1.
215. E.g., Lemley, supra note 17, at 1687–88; see also Dogan & Lemley, supra note
34, at 479–80.
216. For an analysis of the case law on promotional licensing, see discussion infra
Part IV.A.1. Legislators showed their favor toward this practice when, in 1988,
section 5 of the Lanham Act was amended to include the licensing of intent-to-use
trademark applications. “If first use of a mark by a person is controlled by the
registrant or applicant for registration of the mark with respect to the nature and
quality of the goods or services, such first use shall inure to the benefit of the
registrant or applicant, as the case may be.” Lanham Act § 5, 15 U.S.C. § 1055. See 3
MCCARTHY, supra note 1, §§ 18:48, 18:60; see also discussion supra Part II.B.
217. E.g., Marlene B. Hanson & W. Casey Walls, Protecting Trademark Good Will: The
Case for a Federal Standard of Misappropriation, 81 TRADEMARK REP. 480, 484 (1991);
Thomas M. Pitegoff, Franchise Relationship Laws: A Minefield For Franchisors, 45 BUS.
LAW. 289, 290–92 (1989); see also Susser v. Carvel Corp., 206 F. Supp. 636, 640
(S.D.N.Y. 1962), aff’d, 332 F.2d 505 (2d Cir. 1964).
2007]
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379
218
mark to attract a higher number of consumers. In some instances,
franchising has reached such success that it constitutes the only
219
Not
activity carried out by the owners of the licensed mark.
surprisingly, considering its growing importance in the economy,
courts have also endorsed this practice and have upheld franchising
as long as the agreements at issue do not damage the public or
220
competition.
The increasing internationalization of trade and the need for
businesses to expand their markets abroad have also deeply affected
the interpretation of modern licensing. In particular, as a result of
the rising number of foreign countries involved in licensing
programs, calls for the adoption of a common standard for the
validity of licensing worldwide have been mounting in recent years as
part of the general trend toward harmonizing intellectual property
221
laws worldwide.
These calls have interested primarily the United
States, which retains quality control opposite to most other
222
jurisdictions that do not provide for any similar requirement.
While the United States has so far formally resisted these calls, the
growing international pressure for a change, along with the criticism
of United States businesses, have certainly contributed to the recent
shift toward licensing with minimal control, thus approaching
national trademark law de facto to that of other countries.
Finally, trademark owners and other parties in the market have
increasingly used licensing as a strategic tool to reaffirm trademark
218. Friedman, supra note 15, at 355–58.
219. E.g., McDonald’s Corporation, FAQ’s, http://www.mcdonalds.com/corp/fra
nchise/faqs2.html (last visited Sept. 29, 2007).
220. See Susser, 206 F. Supp. at 647 (upholding an ice cream franchise agreement);
Smith v. Waite, 424 S.W.2d 691, 693 (Tex. Civ. App. 1968) (upholding a franchise
agreement).
221. The most relevant international agreement on trademark licensing is the
Agreement on Trade-Related Aspects of Intellectual Property Rights. See Agreement
on Trade-Related Aspects of Intellectual Property Rights, Including Trade in
Counterfeit Goods, Apr. 15, 1994, Marrakesh Agreement Establishing the World
Trade Organization, Annex IC, Legal Instruments—Results of the Uruguay Round,
33 I.L.M. 81 (1994) [hereinafter TRIPS]; see also 5 MCCARTHY, supra note 1, § 29:36;
WORLD INTELLECTUAL PROP. ORG., WIPO INTELLECTUAL PROPERTY HANDBOOK: POLICY,
LAW AND USE 345 (2d ed. 2004), available at http://www.wipo.int/export/sites/www/
about-ip/en/iprm/pdf/ch5.pdf. Yet, despite the increased harmonization of laws,
conditions for the validity of licensing continued to be left to the discretion of
member countries. According to article 21 of TRIPS, “[m]embers may determine
conditions on the licensing and assignment of trademarks, it being understood that
the compulsory licensing of trademarks shall not be permitted.” TRIPS, supra, art.
21.
222. For a reconstruction of various countries’ approaches on trademark
licensing, see 2 STEPHEN P. LADAS, PATENTS, TRADEMARKS, AND RELATED RIGHTS:
NATIONAL AND INTERNATIONAL PROTECTION §§ 715–720 (1975); see also MARY M.
SQUYRES, 1–2 TRADEMARK PRACTICE THROUGHOUT THE WORLD §§ 6–17 (2007).
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rights, settle trademark disputes, or enter agreements whose purpose
223
is, in essence, market control or division of market shares. As noted
earlier, this use of licensing to trade in trademarks as things per se
224
has always been common in the marketplace, but recent decades
225
Also in this respect,
have seen an unusual increase in this trend.
however, courts have generally tolerated these practices as long as the
agreements included the formal provisions of quality control and the
226
public was not negatively affected.
Not surprisingly, this attitude
has further eroded the real applicability of quality control and
brought the judiciary a step closer to granting property rights in
227
trademarks.
1.
Promotional licensing and (the lack of) “quality control”
As indicated above, the growing tendency toward recognizing, and
exploiting, the intrinsic value of trademarks per se has deeply
affected the traditional interpretation of licensing and quality
control. In particular, over the past decades, this trend has led to the
rise of a new type of licensing—promotional licensing or trademark
merchandising—whose purpose is not that of classical licensing, that
is, to augment the quantity of the products originally produced by
trademark owners, but that of building and enhancing brand image
and consumer affiliation by licensing a mark for unrelated goods or
228
Not surprisingly, because of its very nature, this type of
services.
licensing has profoundly challenged the enforcement of quality
229
control.
Historically, the recognition of trademark merchandising dates
back to a landmark decision by the Fifth Circuit in 1975: Boston
230
Professional Hockey Association v. Dallas Cap & Emblem Manufacturing.
In that case, Boston Hockey refused Dallas Cap permission to
duplicate its logo on clothing based on a prior exclusive licensing
223. See discussion infra Part IV.A.2.
224. Isaacs, supra note 14, at 1210.
225. See generally Lisa H. Johnston, Drifting Toward Trademark Rights in Gross, 85
TRADEMARK REP. 19, 22–36 (1995) (discussing the increasing drift of trademarks
toward rights in gross).
226. For an analysis of the case law on strategic uses of trademarks, see discussion
infra Part IV.A.2.
227. E.g., Lemley, supra note 17, at 1687–88.
228. See discussion supra Part I.
229. Promotional trademark licensing changed the role of trademarks with
respect to consumer information. Their function changed from one of creating
“consumer reliance on the mark” to one of “engender[ing] consumer identification
with the mark.” Franklyn, Liability for Trademark Licensors, supra note 26, at 13 (citing
Keating, supra note 3, at 372).
230. 510 F.2d 1004 (5th Cir. 1975), cert. denied, 423 U.S. 868 (1975).
2007]
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381
agreement, but Dallas Cap manufactured and sold clothing bearing
231
232
the “B” mark regardless. By reversing the lower court’s decision,
the Fifth Circuit determined that Dallas Cap had infringed upon
233
Boston Hockey’s mark and found likelihood of confusion in “the
fact that the defendant duplicated the protected trademarks and sold
them to the public knowing that the public would identify them as
234
being the teams’ trademarks.” Hence, the court departed from the
traditional interpretation of the Lanham Act and found that
confusion existed because consumers associated the logos—the
235
“triggering mechanism for the sale” —with the team even in the
236
absence of confusion as to the source of the products.
As expected, this decision was criticized as a step further toward
237
establishing property rights in trademarks.
Still, the court’s
position reflected the growing importance of promotional licensing,
which had already become a source of major revenues for trademark
238
holders at that time, primarily for sport teams and colleges.
This
favorable trend continued during the following years and, even if
many courts proved reluctant to directly affirm Boston Hockey and
231. Id. at 1009.
232. Boston Prof’l Hockey Ass’n v. Dallas Cap & Emblem Mfg., 360 F. Supp. 459
(N.D. Tex. 1973), rev’d, 510 F.2d 1004 (5th Cir. 1975). The district court found no
infringement, stating that consumers did not necessarily expect affiliation between
the apparel bearing the logos and the hockey team. Id. at 463. “The test is not
whether the products in question are duplications of their marks, but whether the
defendant’s use of [them] would mislead the public as to the source of the goods.”
Id. at 462–63. The court issued, however, a limited injunction requiring that Dallas
Cap disclaim any association with the teams since some consumers could assume that
the products were officially licensed by the National Hockey League. Id. at 465.
233. Boston Hockey, 510 F.2d at 1012. The Fifth Circuit based its decision on three
arguments: (1) the commercial value of the logos was created by plaintiffs’ efforts;
(2) defendant sought a license and, if obtained, would have enforced it against
infringers; and (3) selling reproductions of trademarks per se on emblems is an
accepted use for sport teams. Id. at 1011. The court acknowledged, however, that its
decision “may slightly tilt the trademark laws from the purpose of protecting the
public to the protection of the business interests of plaintiffs.” Id.
234. Id. at 1012.
235. Id. The Fifth Circuit stated: “The argument that confusion must be as to the
source of the manufacture of the emblem itself is unpersuasive, where the
trademark, originated by the team, is the triggering mechanism for the sale of the
emblem.” Id. (emphasis added). See Nat’l Football League Props., Inc. v. Consumer
Enters., Inc., 327 N.E.2d 242, 246 (Ill. App. 1975) (finding infringement because
“the buying public has come to associate the trademark with the sponsorship of the
NFL or of the particular member team involved”).
236. Boston Hockey, 510 F.2d at 1012.
237. See Dogan & Lemley, supra note 34, at 471–72 (“[T]he mark in these cases is
rarely serving the traditional function of a trademark. Rather than indicating
something to the consumer about the source . . . of a product, the mark is the
product . . . .”); see also id. at 473–76 (discussing the role of Boston Hockey and
trademark licensing in establishing a property right in trademarks).
238. On the role of promotional licensing providing revenues for non-profit and
for-profit institutions, see Keating, supra note 3, at 370–71.
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239
enforce trademark rights based simply on consumer association,
the majority of the judiciary has adopted a sympathetic attitude
toward merchandising. In particular, courts developed the doctrine
of confusion “as to the sponsorship,” according to which
infringement can be found when consumers mistakenly believe that
the trademark owners sponsored the products bearing identical or
240
confusingly similar marks.
Since consumer perception has
increasingly become that trademark owners authorize promotional
products, this doctrine has undoubtedly facilitated the protection of
241
promotional licensing.
Besides broadening the scope of the likelihood of confusion, the
spread of promotional licensing gave rise to several criticisms of the
quality control requirement as the standard for the validity of
242
trademark licensing. Specifically, it was argued that in promotional
licensing, “the consumer is merely interested in attaining a symbol to
display loyalty, affection or sympathy to a person, institution or cause
243
and the quality-control function has no substantial value.”
Thus,
considering that most often trademark holders lack expertise in the
239. See, e.g., United States v. Giles, 213 F.3d 1247, 1250 (10th Cir. 2000) (stating
that the Fifth Circuit in Boston Hockey relied “upon a novel and overly broad
conception of the rights that a trademark entails”); Int’l Order of Job’s Daughters v.
Lindeburg & Co., 633 F.2d 912, 919 (9th Cir. 1980) (defining Boston Hockey as “an
extraordinary extension of the protection . . . afforded trademark owners”).
240. See, e.g., Univ. of Pittsburgh v. Champion Prods., Inc., 686 F.2d 1040, 1047
(3d Cir. 1982); Nat’l Football League Props., Inc. v. Wichita Falls Sportswear, Inc.,
532 F. Supp. 651, 659 (W.D. Wash. 1982) (“Likelihood of confusion in a sponsorship
context focuses on the product bearing the allegedly infringing marks and asks
whether the public believes the product bearing the marks originates with or is
somehow endorsed or authorized by the plaintiff.”). The Fifth Circuit itself also
adopted this standard and narrowed its holding in Boston Hockey. See Supreme
Assembly, Order of Rainbow for Girls v. J.H. Ray Jewelry Co., 676 F.2d 1079, 1082
(5th Cir. 1982); Ky. Fried Chicken Corp. v. Diversified Packaging Corp., 549 F.2d
368, 388 (5th Cir. 1977) (“Trademark infringement occurs only when the use sought
to be enjoined is likely to confuse purchasers with respect to such things as the
product’s source, its endorsement by the plaintiff, or its connection with the
plaintiff.”).
241. See Keating, supra note 3, at 372 (“A recent survey indicated that 45.3 percent
of the respondents believed that companies making jerseys corresponding to
National Football League jerseys were required to obtain authorization from the
NFL.” (citing Wichita Falls Sportswear, 532 F. Supp. at 658–59)). More recently, for
example, in 2004, “[t]he University of North Carolina at Chapel Hill’s net licensing
royalties . . . totaled $3.7 million.” News Release, Univ. of N.C., Chapel Hill,
Trademark Licensing Revenue Totals $3.7 Million for Fiscal 2004; UNC is Nation’s
Top Performer (Sept. 22, 2004), available at http://www.unc.edu/news/archives/sep
t04/liscense092204.html. See Pallavi Gogoi, Wal-Mart’s Luxury Problem, BUS. WK.
ONLINE, June 13, 2006, http://www.businessweek.
com/investor/content/jun2006/pi20060613_187965.htm (discussing the effect of
counterfeit goods on consumer perception of trademarks and brands).
242. See, e.g., Marks, supra note 5, at 653 (quoting Keating, supra note 3, at 378–
79).
243. Keating, supra note 3, at 378.
2007]
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383
promotional goods industry, to require them “to inaugurate an
imaginary quality-control program to satisfy legal requirements”
244
would “elevate form over substance” to the detriment of licensors
and licensees. Additionally, critics stressed that retaining quality
control in trademark merchandising would not benefit consumers,
who often do not expect “a preordained quality level” for
245
promotional products, but instead infringers, who could challenge
246
infringement claims based on the inadequacy of quality control.
Still, despite these criticisms, the traditional standard for the
validity of licensing has continued to hold, thus obliging licensors to
implement quality control with respect to promotional licenses lest
247
they face claims of naked licensing.
Yet, as anticipated, this duty
has often proved a formality rather than an actual exercise of
248
control.
Notably, even if most agreements included standard
quality control provisions, licensors have usually relied on their
licensees, and their knowledge of the promotional products, to
249
ensure the quality of the marked goods.
This has not translated,
however, into a lack of interest for product quality and its consistency
250
on the part of licensors.
On the contrary, because promotional
products aim precisely at building brand image, product quality has
always been of utmost importance for trademark owners, who just
choose to delegate the details of the production process, and thus the
251
technicalities of quality control, to licensees.
Naturally, this trend greatly contributed to the general drifting
away from a strict enforcement of quality control. Well aware of
these issues, the judiciary tried to fit promotional licensing under the
current requirement by broadening the interpretation of “adequate
control” and affirming that quality control could be effectively
244. Id.
245. Johnston, supra note 225, at 35 (“The argument for abolishing the quality
control requirement focuses on the fact that in promotional merchandising the
consumer does not expect a preordained quality level . . . .”).
246. Keating, supra note 3, at 378; see Johnston, supra note 225, at 35–36 n.79
(citing Keating, supra).
247. Lanham Act § 5, 15 U.S.C. § 1055 (2000).
248. E.g., Johnston, supra note 225, at 35–36.
249. See discussion supra Part III.A.2.
250. The lack of litigation in this respect seems to signify that consumers have
been generally satisfied with the quality of promotional products. See generally David
Kiley, Best Global Brands: How the BusinessWeek/Interbrand Top 100 Companies Are
Using Their Brands to Fuel Expansion, BUS. WK., Aug. 7, 2006, at 54 (discussing the
ability of the nation’s top brands to provide consistent customer satisfaction).
251. As elaborated in Part V, trademarks have a self-enforcing feature, and the
market will not forgive, in the long term, brand owners who sacrifice quality for
short-term gains. See discussion infra Part V.A; see also LANDES & POSNER, supra note
84, at 168.
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252
exercised by third parties, including licensees. Yet, while accepting
that control at large could also satisfy the legal requirement, courts
have turned to the reality of the agreement at issue, and to the
253
consistency of the product quality, to determine its validity.
2.
Additional practices inconsistent with “quality control”
Besides the rise of promotional licensing, additional trademark
practices have contributed to the discontinuity between modern
trademark licensing and the quality control requirement.
In
particular, the past two decades have witnessed the expansion of the
practice of assignment and license-back, where a trademark owner
assigns her mark to an assignee, who in turn grants back to the
254
assignor a license to continue using the mark. Most often, this type
of agreement is used by trademark holders as a useful means to settle
255
claims of trademark infringement or to secure priority over a mark
256
in order to assert claims of opposition or trademark infringement.
During the past decades, trademark holders have also increasingly
adopted this type of agreement to use their marks as collaterals for
257
loans.
The rationale behind this practice, however, profoundly deviates
258
from the traditional view of trademark law.
Specifically, the
primary purpose for the assignees/licensors is to acquire the control
of the assigned mark and avoid claims of trademark abandonment, or
laches and acquiescence on the part of future infringers, rather than
252. See discussion supra Part III.A.1–2.
253. See discussion supra Part III.A.2.
254. Calboli, Assignment “With Goodwill,” supra note 13, at 795.
255. See 3 MCCARTHY, supra note 1, § 18:9 (“[I]n settlement of pending litigation,
plaintiff may obtain an assignment of rights in the mark and license back [to] the
defendant. If there was evidence of customer confusion, this arrangement would
bring commercial reality into congruence with customer perception that plaintiff was
controlling defendant’s use.”).
256. See Calboli, Assignment “With Goodwill,” supra note 13, at 795 (citing Glow
Indus. v. Lopez, 273 F. Supp. 2d 1095, 1097, 1104 (C.D. Cal. 2003)).
257. The Restatement (Third) of Unfair Competition recites:
An assignee may license the assignor to use the trademark after an
assignment. If the assignment satisfies the requirements stated in this
Section and the subsequent license back to the assignor satisfies the
requirements stated in § 33, the priority arising from the assignor’s original
use of the trademark is maintained.
§ 34 cmt. c (1995).
258. See discussion supra Part II.A. This practice strongly resembles a coexistence
agreement between the parties. A coexistence agreement creates “concurrent use
rights” in a particular mark. See Times Mirror Magazines, Inc. v. Field & Stream
Licenses Co., 103 F. Supp. 2d 711, 713 (S.D.N.Y. 2000), aff’d, 294 F.3d 383 (2d Cir.
2002); see also Indus. Indem. Co. v. Apple Computer, Inc., 79 Cal. App. 4th 817, 823,
842 (1999) (further defining coexistence agreements).
2007]
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385
259
entering “substantially similar” businesses.
On their part,
assignors/licensees enter these transactions primarily to avoid a
finding of trademark infringement and to continue using the mark at
issue for the same products as prior to the signing of the agreement,
rather than producing or distributing under a licensing program.
Likewise, when a mark is used as collateral for a loan, the purpose of
the agreement for the assignee/licensor/lender is just to acquire
nominal
control
over
the
mark
and,
for
the
assignor/licensee/borrower to continue disposing of it as
260
previously.
As expected, the judiciary has confirmed the validity of this
261
262
as a “‘well-settled commercial practice,’”
further
procedure
supporting the contention that the judiciary is moving away from
quality control. Theoretically, courts have continued to affirm that
these transactions are valid only as long as they do not disrupt the
continuity of the marked products and provided that
263
assignees/licensors maintain control over their quality.
Yet, these
264
limits have proved sterile and formalistic, and the courts have
generally relied on the language of the agreement regardless of the
265
effective control exercised by licensors.
In other words, by using
259. Calboli, Assignment “With Goodwill,” supra note 13, at 795.
260. E.g., Visa, U.S.A., Inc. v. Birmingham Trust Nat’l Bank, 696 F.2d 1371, 1374
(Fed. Cir. 1982).
261. J. Thomas McCarthy provides an overview of judicial decisions on the issue.
See 3 MCCARTHY, supra note 1, § 18:9 n.4 (citing Brewski Beer Co. v. Brewski Bros., 47
U.S.P.Q.2d (BNA) 1281, 1288–89 (T.T.A.B. 1998)); Sands, Taylor & Wood v. Quaker
Oats Co., 18 U.S.P.Q.2d (BNA) 1457, 1467–68 (N.D. Ill. 1990), aff’d in part and rev’d
in part, 978 F.2d 947 (7th Cir. 1992); Raufast S.A. v. Kicker’s Pizzazz, Ltd., 208
U.S.P.Q. (BNA) 699, 702 (E.D.N.Y. 1980); Syntex Labs., Inc. v. Norwich Pharmacal
Co., 315 F. Supp. 45, 55–56 (S.D.N.Y. 1970), aff’d, 437 F.2d 566 (2d Cir. 1971).
262. See E. & J. Gallo Winery v. Gallo Cattle Co., 967 F.2d 1280, 1290 (9th Cir.
1992) (quoting Visa, 696 F.2d at 1377). This practice has “the beneficial effect of
bringing “commercial reality into congruence with customer perception.” Id.
(citation omitted).
263. See, e.g., Haymaker Sports, Inc. v. Turian, 581 F.2d 257, 261 (C.C.P.A. 1978)
(“A licensor may license his mark if the licensing agreement provides for adequate
control by the licensor over the quality of goods or services produced under the
mark by a licensee.”); see Visa, 696 F.2d at 1377.
264. See Visa, 696 F.2d at 1377 (“Contrary to the view of the Board, it is not
determinative that there was ‘no evidence showing to what extent Visa has actually
exercised real and effective control over the nature and quality of the services
performed by Alpha Beta under the licensed mark.’”) (emphasis added).
265. Glow Indus. v. Lopez, 273 F. Supp. 2d 1095, 1114–15 (C.D. Cal. 2003).
The language of the agreement demonstrates that [defendant] maintained
control over the quality of the . . . products distributed by [the assignor]
pursuant to the license-back, and the burden thus shifts to [plaintiff] to
demonstrate that [defendant] did not exercise that control.
[The
assignor]’s lack of recollection [of such control] is not sufficient to meet that
burden, and it must be assumed . . . that [defendant] maintained control over
the quality of the products [the assignor] distributed under the mark.
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assignments and licenses-back, trademark owners and other market
players bypass the legal requirement for trademark assignment and
licensing under the implicit consent of the courts and exchange
marks as “things” in the market place as they seem convenient.
Finally, as additional evidence of the growing trend against
findings of naked licensing, part of the judiciary has developed the
266
so-called doctrine of “licensee estoppel,”
according to which
trademark licensees are estopped from challenging the validity of the
267
licensed marks, inter alia, for lack of quality control. In particular,
to safeguard licensors and licensing agreements, courts have held
that a licensee is estopped from challenging the validity of the
licensed mark for the whole duration of the agreement and, should
he bring a claim against the mark afterwards, the claim should be
268
limited to facts that arose after the expiration of the contract.
The rationale of this doctrine, according to the courts, is based on
269
equitable principles and is aimed at balancing the interest of the
public in challenging invalid marks against that of trademark owners
270
Yet, in practice, several
in “predictable contractual relationships.”
courts have held that licensee estoppel foreclosed licensees from
challenging the licensed mark on the ground that licensors failed to
271
exercise adequate control over the licensing agreements.
In
addition, even if part of the judiciary has not agreed with this
272
position, courts have consistently affirmed that licensees “should
Id. at 1111 (emphasis added).
266. James M. Treece, Licensee Estoppel in Patent and Trademark Cases, 53 IOWA L.
REV. 525, 525 (1967).
267. For a general overview of this practice and various situations where licensees
may be estopped from bringing claims against licensors, see 3 MCCARTHY, supra note
1, § 18:63.
268. See generally Prof’l Golfers Ass’n v. Bankers Life & Cas. Co., 514 F.2d 665, 671
(5th Cir. 1975) (dismissing claim of abandonment because of uncontrolled licensing
during the license because estoppel barred the defense).
269. RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 33 cmt. d (1995) (“[A] court
remains free to consider the particular circumstances of the case, including the
nature of the licensee’s claim and the terms of the license.”); see Idaho Potato
Comm’n v. M & M Produce Farm & Sales, 335 F.3d 130, 134–39 (2d Cir. 2003).
270. 3 MCCARTHY, supra note 1, § 18:63.
271. See Creative Gifts, Inc. v. UFO, 235 F.3d 540, 548 (10th Cir. 2000); Prof’l
Golfers, 514 F.2d at 671; Alpha Tau Omega Fraternity, Inc. v. Pure Country, Inc., No.
IP 01-1054-C-B/F, 2004 WL 3391781, at *10 (S.D. Ind. Oct. 26, 2004); STX, Inc. v.
Bauer USA, Inc., 43 U.S.P.Q.2d (BNA) 1492, 1500–01 (N.D. Cal. 1997); Estate of
Biro v. Bic Corp., 18 U.S.P.Q.2d (BNA) 1382, 1386 (T.T.A.B. 1991); see also
RESTATEMENT (THIRD) OF UNFAIR COMPETITION § 33 cmt. d, reporters’ note (1995)
(“The case for estoppel is weaker when the licensee asserts a lack of control by the
licensor over other users.”).
272. See, e.g., Sheila’s Shine Prods., Inc. v. Sheila Shine, Inc., 486 F.2d 114, 123–24
(5th Cir. 1973); Miller v. Glenn Miller Prods., 318 F. Supp. 2d 923, 945–46 (C.D. Cal.
2004), aff’d, 454 F.3d 975 (9th Cir. 2006); Westco Group, Inc. v. K. B. & Assocs., 128
F. Supp. 2d 1082, 1088–90 (N.D. Ohio 2001).
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387
not be permitted to rely upon [their] own conduct of selling noncomplying and inferior goods . . . as a basis for challenging the
273
adequacy of quality control exercised by the trade mark owner.”
Similarly, courts have agreed that the licensees who resisted
complying with quality standards are not permitted to challenge the
validity of marks at issue, arguing that such non-compliance
274
constitutes inadequate control.
In summary, even if the courts have emphasized that licensee
estoppel aims at safeguarding “predictable contractual relationships,”
this doctrine has increasingly permitted the judiciary to relax the
application of quality control to the point of excluding licensees from
bringing claims of naked license. Admittedly, most often licensees
may not have a direct interest in bringing such claims since they also
275
have a specific interest in the validity of the licensed mark. Still, in
some instances, they may also have valid reasons for such
276
challenges.
As a result, this doctrine confirms the growing
inclination of the courts to treat marks as property, and as such, to
apply equitable principles to them, including overlooking lack of
quality control and upholding the licensing contractual relationship
as long as it does not bring harm to the public.
B. Toward a De Facto Abandonment of “Quality Control”?
In light of the above, it seems clear that modern trademark
licensing is drifting away from, and in some instances has already de
facto abandoned, the requirement of quality control as traditionally
277
intended by the courts and the Lanham Act in 1946. As indicated
in Part II, this trend has directly followed the general shift toward the
“propertization” of trademark protection and the resulting
willingness of courts and legislators to protect trademarks as things
per se on the basis of the impairment of the marks, regardless of
278
consumer confusion.
Notably, and well aware of the growing importance of licensing
both as a business technique and source of revenues, courts have
repeatedly proven reluctant in adopting a conservative approach to
trademark licensing and requiring a strict application of quality
273. See 3 MCCARTHY, supra note 1, § 18:63 (citing Leatherwood Scopes Int’l v.
Leatherwood, 63 U.S.P.Q.2d (BNA) 1699 (T.T.A.B. 2002); Westco Group, 128 F. Supp.
2d 1082)).
274. Id.
275. See discussion supra Part II.B.1.
276. 3 MCCARTHY, supra note 1, § 18:63.
277. Parks, supra note 5, at 545; Lemley, supra note 17, at 1714.
278. See discussion supra Part II.A.
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279
control.
Likewise, the judiciary has generally favored, or at least
tolerated, practices such as merchandising and assignment and
license-back, whose primary objectives are to exploit the value, and
280
control the use, of trademarks per se.
In addition, the judiciary
itself has applied equitable principles to trademark licensing and
developed the doctrine of licensee estoppel to protect licensors and
281
licensing contracts regardless of the lack of quality control.
Still, despite this shift toward protecting trademark rights in gross,
the judiciary has never officially repealed or formally criticized the
282
current standard for the validity of licensing.
Instead, courts have
adopted a pragmatic position that reaches a compromise between the
need to foster business endeavors and the traditional rationale of
283
trademark law—protecting consumers and the market.
A growing
number of courts have increasingly focused on the final quality of
products when assessing the validity of licensing and have “assumed”
that control was exercised where quality remained consistent and the
public was not deceived, even if licensors did not strictly monitor
284
their licensees.
Undoubtedly, this approach has allowed the judiciary to provide
licensors and licensees with a more flexible standard without the
285
need to challenge the current requirement.
Despite this obvious
advantage, however, the shift toward licensing de facto with minimal
or no control has eroded, slowly but steadily, the scope of quality
279. See discussion supra Part III.A.1–2.
280. See Keating, supra note 3, at 372; see also Franklyn, Liability for Trademark
Licensors, supra note 26, at 14 (“In promotional licensing, the trademark functions
primarily as an advertising tool, not as an indicator of the physical source of the
goods or that the goods are of the same quality as all other goods bearing the same
mark.”).
281. See Creative Gifts, Inc. v. UFO, 235 F.3d 540, 548 (10th Cir. 2000) (“The
licensee is estopped from claiming any rights against the licensor which are
inconsistent with the terms of the license. . . . He is estopped from contesting the
validity of the mark . . . or challenging the license agreement . . . .” (quoting 3
CALLMAN, supra note 7, § 19:48)); see also discussion supra Part IV.A.2.
282. See, e.g., Barcamerica Int’l USA Trust v. Tyfield Imps., Inc., 289 F.3d 589, 595–
96 (9th Cir. 2002) (“It is well-established that ‘[a] trademark owner may grant a
license and remain protected provided quality control of the goods and services sold
under the trademark by the licensee is maintained.’” (quoting Moore Bus. Forms,
Inc. v. Ryu, 960 F.2d 486, 489 (5th Cir. 1992))); see also Kitterman, supra note 140, at
516 (“Though many merely pay lip service to the quality control obligation . . . the
requirement that some degree of quality control actually be exercised remains
effective.”).
283. See discussion supra Part III.A.1–2.
284. See, e.g., Taco Cabana Int’l, Inc. v. Two Pesos, Inc., 932 F.2d 1113, 1121 (5th
Cir. 1991), aff’d, 505 U.S. 763 (1992); Transgo, Inc. v. Ajac Transmission Parts Corp.,
768 F.2d 1001, 1017 (9th Cir. 1985); Land O’Lakes Creameries, Inc. v. Oconomowoc
Canning Co., 330 F.2d 667, 670–71 (7th Cir. 1964).
285. See discussion supra Part III.A.2.
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389
control, which has increasingly been reduced to a sterile
286
requirement. Still, since quality control continues to be the formal
standard for the validity of licensing, a minority of the courts have
continued to require actual proof of control to uphold licensing
agreements, thus creating further uncertainty as to what constitutes a
287
valid license. As elaborated in Part V, this uncertainty is no longer
sustainable and the time has come to provide a consistent standard
for the validity of licensing that will bridge the gap between the
current de facto situation, the desire of licensors and licensees to
exploit their marks, and the need to protect consumers and the
288
market against unscrupulous licensing.
V. THE CASE FOR ABANDONING “QUALITY CONTROL”
As described in Parts II, III, and IV, the general trend seems to
favor a flexible standard for the validity of licensing. Since the
implementation of the Lanham Act, courts have adopted an
increasingly broad interpretation of quality control and accepted
almost any evidence to declare licensing valid. Additionally, they
have required a very high burden of proof to declare the forfeiture of
trademark rights and have also upheld licensing de facto without
control. This trend, however, has not established a clear path of
acceptance for licensing without control, and the outcomes of
289
judicial decisions are still proving inconsistent.
This Part stresses the failures of the current requirement and
advocates for a change allowing licensing “with or without control” as
290
long as the public is not deceived. This Part argues that this change
286. See Taco Cabana, 932 F.2d at 1121 (requiring only “adequate control” for
trademark licensing); Ky. Fried Chicken Corp. v. Diversified Packaging Corp., 549
F.2d 368, 387 (5th Cir. 1977) (“Retention of a trademark requires only minimal
quality control . . . .”); see also Parks, supra note 5, at 538 (claiming the quality control
requirement is outdated and useless).
287. Ritchie v. Williams, 395 F.3d 283, 290 (6th Cir. 2005); Barcamerica Int’l, 289
F.3d at 596–97; Halo Mgmt., L.L.C. v. Interland, Inc., 308 F. Supp. 2d 1019, 1028–31
(N.D. Cal. 2003).
288. See generally Parks, supra note 5, at 538–41 (discussing the problems created
for trademark owners and courts when quality control is defined inconsistently).
289. See discussion supra Part III.B.
290. Calboli, Assignment “With Goodwill,” supra note 13, at 828–41. As I have
indicated above, see supra note 13, the arguments in favor of a legislative change
toward a regime of trademark assignment “with or without goodwill” and those in
favor of licensing “with or without control” are partially similar, in particular with
respect to the failures and the ambiguities surrounding the respective requirements.
As a result, the reader may encounter some similarities between the main text of this
section and the corresponding footnotes, and the text and footnotes in Calboli,
Assignment “With Goodwill,” supra note 13, at 828–41. As indicated earlier, however, all
the arguments and reference used in this section are originally targeted toward
supporting my claim in favor of licensing “with or without control.”
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will restore consistency between the standard for the validity of
licensing and its subsequent interpretation and enforcement.
Despite common criticism, this change will not adversely affect
consumers, for the courts have alternative and better tools to protect
the purchasing public. Additionally, it will prevent superfluous legal
actions initiated by competitors whose ultimate goal is not to
291
safeguard consumers, but to control the course of trade.
A. The Intrinsic Flaws of “Quality Control”
As repeatedly noted, the adoption of the quality control
requirement has traditionally rested on the belief that requiring
trademark owners to exercise such control increases the chances of
292
continuity in product quality.
As this Article has highlighted,
however, the reality of trademark practice has called into question
this assumption, and courts have interpreted and enforced the
293
quality control standard inconsistently at best.
As a result, the
original goal of the requirement—protecting consumers and
competition—has often not been achieved, whereas trademark
owners and licensees continue to wonder what constitutes valid
294
licensing under the current standard.
Once again, the lack of a
consistent and clear definition of what represents “quality control”
295
Not surprisingly, this
primarily accounts for such uncertainty.
uncertainty has brought increasing criticism, calling for the
296
abandonment of the current requirement.
The reasons for much of this uncertainty can be uncovered by
revisiting the rationale of the requirement and, in particular, by
highlighting its obvious flaws. Notably, despite the general intention
behind it, the adoption of quality control has never included a direct
prohibition that licensees do not modify product quality. Instead, the
letter of the law has only required that licensors “control” licensees
with respect to the “nature and quality” of the marked products so as
291. See Friedman, supra note 15, at 373; see also Noel Gillespie, Licensing and the
“Related Companies” Doctrine, 12 J. CONTEMP. LEGAL ISSUES 209, 210–11 (2001); Parks,
supra note 5, at 538–41.
292. See 1 MCCARTHY, supra note 1, § 3:10 (“[A] trademark . . . could also serve to
indicate a level of consistent quality.”).
293. See supra Part III.A–B.
294. See Parks, supra note 5, at 536–37; see also Bannon, Revisiting “The Rational
Basis of Trademark Protection,” supra note 15, at 65.
295. See discussion supra Part III.A–B.
296. See Parks, supra note 5, at 557 (“[T]he quality control requirement should be
abandoned as a rule of law. The failure of the strict quality theory of marks means
that, in reality, there is no reasoned basis on which to distinguish licensed from nonlicensed trademarks, and to impose vague, ad hoc quality requirements on licensed
goods only.”); see also Keating, supra note 3, at 378–79.
2007]
THE SUNSET OF “QUALITY CONTROL”
391
297
to not “deceive the public.” In other words, trademark owners have
been legally obligated only to monitor their licensees who, in turn,
have been obligated only to refrain from using the mark
298
misleadingly.
As a result, quality control has never truly
guaranteed, but merely facilitated, continuity in product quality, in
the hope that, because of trademark owners’ control, licensees would
299
not change product quality or face claims of invalid licensing.
In addition, the current requirement imposes the duty to maintain
consistent product quality only to trademark owners that are licensors
and not to all trademark owners. In other words, trademark law has
never questioned the ability of non-licensor trademark owners to
300
change the quality of their products provided that the public is not
301
deceived, yet the law has historically restricted the ability of
trademark licensors to effect such changes. Not surprisingly,
licensors and practitioners have lamented this differential treatment,
for which no sound legal reasoning has been offered and which
302
cannot “be justified in the name of the public interest” since the
public “has no collective ‘right’ to prevent licensors from making the
same subjective business decisions concerning the quality of marked
297. See Lanham Act § 5, 15 U.S.C. § 1055 (2000); see also Bannon, Revisiting “The
Rational Basis of Trademark Protection,” supra note 15, at 77 (“The consumer
understands the mark to function as a proclamation of the producer’s commitment
that all goods bearing the identical mark will be consistent in ‘nature, quality, and
characteristics.’” (citation omitted)).
298. Generally, trademark owners and licensees are the primary beneficiaries of
consistent product quality. Landes and Posner provide an accurate analysis of this
aspect of trademark. Specifically, they stress that “trademarks have a self-enforcing
feature” and that “[t]hey are valuable only insofar as they denote consistent quality,
and so[,] only a firm able to maintain consistent quality has an incentive to expend
the resources necessary to develop a strong trademark.” LANDES & POSNER, supra
note 84, at 168.
299. See discussion supra Part II.B; see also Calboli, Assignment “With Goodwill,” supra
note 13, at 829–30 (elaborating a similar argument against the rule on trademark
assignment).
300. As indicated in Calboli, Assignment “With Goodwill,” supra note 13, at 830
n.317, the “New Coke” case clearly exemplified this point. In that case, Coca-Cola,
Inc. decided to discontinue its traditional cola and produce, instead, the “New
Coke.” Yet, the market reacted very negatively to such change, and accordingly the
company decided to reinstate the traditional cola under the name “Coca-Cola
Classic.” See Michael Bastedo & Angela Davis, God, What a Blunder: The New Coke
Story, COLA FOUNTAIN, Dec. 17, 1993, http://web.archive.org/web/20060515214006/
http://members.lycos.co.uk/thomassheils/newcoke.htm; see also Parks, supra note 5,
at 545–47 (discussing the faults of the quality assurance theory).
301. Deceptive trademarks are subject to cancellation according to section 14(c).
Lanham Act § 14(c), 15 U.S.C. § 1064(3). Section 2(a) of the Lanham Act also
expressly prohibits the registration of trademarks that are “deceptive.” 15 U.S.C.
§ 1052(a). E.g., In re Budge Mfg. Co., 857 F.2d 773, 776 (Fed. Cir. 1988); Bureau
Nat’l Interprofessionnel Du Cognac v. Int’l Better Drinks Corp., 6 U.S.P.Q.2d (BNA)
1610, 1616 (T.T.A.B. 1988).
302. Parks, supra note 5, at 537.
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303
goods as are made by non-licensors.”
Furthermore, the current
requirement does not consider that, at times, quality variations may
be required, or suitable, to respond to changes in product standards
304
and market demands.
Accordingly, to prevent licensors and
licensees from changing product quality could possibly affect their
305
very existence in the marketplace. As a result, to deny licensors and
licensees this flexibility may eventually undermine their abilities to
compete in the marketplace.
The increasing use of promotional licensing among many sectors
306
of the market has brought additional criticisms to quality control.
As repeatedly noted, this type of licensing usually involves the use of a
307
mark on unrelated products whose quality can rarely be monitored
effectively by trademark owners because of their lack of direct
expertise in the field. Instead, trademark owners delegate such
control to their licensees and simply ensure that all products bearing
308
their marks share the same quality once in the market.
Accordingly, if “[i]n promotional trademark licensing, failure of the
licensor to maintain quality-control of the product . . . does not
309
constitute . . . misrepresentation,” it is thus increasingly difficult to
sustain the idea that the same requirement should be applied to
traditional trademark licensing. Similarly, the increasing use of
trademark strategies such as assignments and licenses-back, and the
development of judicial doctrines such as licensee estoppel have also
called into question the validity of quality control and the extent to
310
which it satisfies the current needs of the marketplace.
303. Id.
304. Car emission standards, environmental requirements, food and drug
requirements, and labeling requirements are examples where businesses/trademark
owners are obliged to change the quality of their products. See generally id. at 545–46
(discussing some of these mandatory requirements).
305. See Calboli, Assignment “With Goodwill,” supra note 13, at 833–36 (making a
similar argument against the rule of assignment “with goodwill”).
306. See discussion supra Part IV.A.1.
307. Keating, supra note 3, at 365–69.
308. See Marks, supra note 5, at 650–53.
So long as the public obtains what it expects, there is no harm to the
trademark, whether or not quality controls are exercised by the licensor.
Only if the licensee changes the quality of the goods, for better or for worse,
are expectations upset and only then could the trademark be denigrated or
diminished. In such case, the licensor has an obligation to act and to
reassert quality control standards over the marketing and distribution of the
goods, if possible.
Id. at 654.
309. See id. at 653; see also id. (noting that “in this type of marketing the consumer
does not expect a preordained quality level”).
310. See discussion supra Part IV.A.2.
2007]
THE SUNSET OF “QUALITY CONTROL”
393
To respond to these problems, courts have opted for a realistic
311
approach, defined quality control broadly, and accepted a vast
range of evidence to prove that control had, in fact, been exercised.
Courts have also increasingly focused their analysis on whether the
public has been deceived as the result of variations in product quality.
Lastly, they have refrained from voiding licensing agreements with
the exception of cases where consumer deception was beyond any
312
doubt.
As indicated earlier, the main reason courts have been hesitant to
declare trademark licenses invalid is their fear that trademark
infringers will exploit this argument to support a defense that their
313
accusers have “unclean hands.”
In other words, rather than
protecting consumers damaged by differences in the quality of the
marked products, quality control most often protects infringers who
use the requirement as a counterclaim to divert the court’s attention
314
from the infringement itself.
Indeed, most courts agree that
315
consumers do not have standing under the Lanham Act. Similarly,
nobody, not even the USPTO, has the duty to monitor whether or
not trademark owners comply with the requirement of quality
control, and licensors are not obliged to present evidence of such
316
control to anyone.
Certainly, this lack of supervision and the fact
that the enforcement of quality control is left to the discretion of
311. See discussion supra Part III.A.1–2.
312. See discussion supra Part III.A.1–2.
313. The “unclean hands” defense is often asserted affirmatively as a counterclaim
for cancellation of the plaintiff’s trademark registration pursuant to sections 14 and
37 of the Lanham Act. See 15 U.S.C. § 1064 (2000) (regarding the power of a private
party to apply for cancellation of a registration); id. § 1119 (regarding the power of
the court to cancel registration); see also 6 MCCARTHY, supra note 1, § 31:44–58
(discussing extensive case law on this aspect).
314. See, e.g., Everett O. Fisk & Co. v. Fisk Teachers’ Agency, Inc., 3 F.2d 7, 9 (8th
Cir. 1924), superseded by statute, Lanham Act § 5, Pub. L. No. 489, 60 Stat. 427, 429
(1946); In re Celanese Corp. of Am., 136 U.S.P.Q. (BNA) 86, 87–88 (T.T.A.B. 1962).
315. Although the trademark statute extends the right to bring a civil action to
“any person,” Lanham Act § 43, 15 U.S.C. § 1125(a)(1), courts have usually denied
that the general public has standing under the Lanham Act. See, e.g., Seven-Up Co. v.
Coca-Cola Co., 86 F.3d 1379, 1383–87 (5th Cir. 1996); Serbin v. Ziebart Int’l Corp.,
11 F.3d 1163, 1170 (3d Cir. 1993); Dovenmuehle v. Gilldorn Mortgage Midwest
Corp., 871 F.2d 697, 699–701 (7th Cir. 1989); Colligan v. Activities Club of N.Y., Ltd.,
442 F.2d 686, 691–94 (2d Cir. 1971); see also 5 MCCARTHY, supra note 1, § 27:39
(discussing consumer and non-commercial standing to sue).
316. See Jennifer Rudis Deschamp, Has the Law of Products Liability Spoiled the True
Purpose of Trademark Licensing? Analyzing the Responsibility of a Trademark Licensor for
Defective Products Bearing Its Mark, 25 ST. LOUIS U. PUB. L. REV. 247, 271 (2006)
(“[T]rademark licensors have an existing obligation to monitor the licensees and
exercise control over the quality of the goods produced bearing their trademarks.”).
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competitors (and defendants) have contributed to the uncertainty
317
surrounding the requirement.
Finally, courts’ reluctance to embrace the quality control standard
stems from the serious implication of voiding a trademark license. If
a trademark owner has allowed another party to invalidly use its
mark, the mark may be declared abandoned or cancelled, and the
trademark owner will have forfeited its right to use the mark. Thus,
“a finding of abandonment through insufficient control means that
multiple sources can sell products . . . of varying quality under the
318
mark, enhancing the risks of consumer deception and confusion.”
Paradoxically, this would harm rather than help consumers, for
without the guarantee that a mark stands for a certain product of a
certain quality, consumers will have to invest more time and money
into deciding which products to buy. In other words, if a mark is
cancelled and returned to the public domain where multiple parties
may freely use it, consumers will have a very difficult time identifying
the product they originally sought from the many products that now
bear the same mark, and they will thus face a greater chance of
deception than if the licensing agreement had been upheld as
319
valid.
B. The Need for a Better Rule on Modern Trademark Licensing
In the light of the above, it seems undisputable that the current
standard for the validity of trademark licensing has been reduced, in
practice, to a formalistic and confusing requirement, which is also out
320
of touch with the needs of modern manufacturing and distribution.
As this Article has demonstrated, the judiciary is just as responsible
for this situation. Courts have in fact interpreted quality control
erratically and inconsistently, and, in some instances, have declared
agreements valid even without control as long as the public is not
317. See Parks, supra note 5, at 561 (“[T]he ‘public protection’ afforded by
trademark laws is indirect, flowing from successful infringement suits which remove
infringing marks from the market place, thereby eliminating public confusion as to
the true source of marked goods.”); see also Calboli, Assignment “With Goodwill,” supra
note 13, at 831–32 (elaborating a similar argument against the rule of assignment
“with goodwill”).
318. Gillespie, supra note 291, at 211; Hanak, supra note 8, at 367.
319. See Rudolph J. Kuss, Comment, The Naked Licensing Doctrine Exposed: How
Courts Interpret the Lanham Act to Require Licensors to Police Their Licensees & Why this
Requirement Conflicts with Modern Licensing Realities & the Goals of Trademark Law, 9
MARQ. INTELL. PROP. L. REV. 361, 384–86 (2005). But see Johnston, supra note 225, at
26–27; Noah D. Genel, Note, Keep It Real: A Call for a Broader Quality Control
Requirement in Trademark Law, 8 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 269, 291
(1997).
320. Parks, supra note 5, at 531.
2007]
THE SUNSET OF “QUALITY CONTROL”
395
321
confused.
Recent trademark practices such as promotional
licensing, assignments and licenses-back, and the doctrine of licensee
estoppel have also proven incompatible with the traditional
322
interpretation of quality control.
As elaborated earlier, this judicial indulgence toward licensing can
best be explained by considering the growing importance and use of
323
this practice in the economy during the past century.
Generally,
besides adopting a broad interpretation and accepting a vast range of
evidence to prove the existence of control, courts have also
established very high burdens of proof for claimants before declaring
324
trademark rights forfeited due to naked licensing.
Only in a
minority of cases has the judiciary reverted to a conservative
approach and declared licensing without control invalid. Still,
trademark owners and licensees continue to be left with many doubts
as to the conditions upon which they can license their marks or use
them, and predicting judicial responses represents a risky, and
325
potentially costly, business.
This situation must be addressed. Today’s economy heavily relies
on the use of licensing in most sectors of the market, both for the
production and distribution of goods and services, and such
uncertainty clearly jeopardizes the ability of trademark owners and
licensees to compete in the marketplace. Thus, “[i]f it is true that
ambiguities [have always] characterize[d] trademark law because of
326
its social, emotional, and irrational basis,” the legal system cannot
impose upon trademark owners and licensees the burden to rely on
327
“an unpredictable [judicial] rule of reason” to decide how to
structure valid licensing agreements.
Accordingly, this Article
advocates for a change in the current rule in favor of a new, and
321. See discussion supra Part III.A.2.
322. See discussion supra Part IV.A.1–2.
323. See, e.g., Steven P. Mandell et al., Drafting Software and Trademark Licenses for
Litigation, 845 PLI/PAT 795, 822 (2005) (“Trademark licensing is big business. The
trademark licensing business has grown into nearly a $100 billion industry in the U.S.
alone.”); Marks, supra note 5, at 645–48.
324. E.g., Oberlin v. Marlin Am. Corp., 596 F.2d 1322, 1326–27 (7th Cir. 1979);
Heaton Distrib. Co. v. Union Tank Car Co., 387 F.2d 477, 485 (8th Cir. 1967);
Embedded Moments, Inc. v. Int’l Silver Co., 648 F. Supp. 187, 194 (E.D.N.Y. 1986);
Syntex Labs., Inc. v. Norwich Pharmacal Co., 315 F. Supp. 45, 56 (S.D.N.Y. 1970),
aff’d, 437 F.2d 566 (2d Cir. 1971); Susser v. Carvel Corp., 206 F. Supp. 636, 641–43
(S.D.N.Y. 1962), aff’d, 332 F.2d 505 (2d Cir. 1964); Morse-Starrett Prods. Co. v.
Steccone, 86 F. Supp. 796, 805 (N.D. Cal. 1949).
325. See 3 MCCARTHY, supra note 1, § 18:10 (discussing the rule against assignment
in gross); see also Calboli, Assignment “With Goodwill,” supra note 13, at 832–33
(stressing the same problem with respect to the judicial application of the rule on
assignment).
326. Calboli, Assignment “With Goodwill,” supra note 13, at 833.
327. Id.
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better, standard, which will resolve most of the current controversy
and provide more flexibility for competitors, while still protecting the
public against confusion and deception.
1.
It is time to adopt licensing with or without “quality control”
Considering the current situation, a change toward a regime of
more flexible licensing, and particularly of licensing “with or without
quality control,” seems to represent the only viable solution to resolve
328
the intrinsic flaws of the present standard.
Accordingly, following
the position de facto adopted by part of the judiciary, this Article
suggests that licenses should be considered automatically valid
regardless of trademark owners’ actual control when product quality
stays the same or when, if variations in quality have occurred,
licensors and licensees have taken all necessary measures to inform
329
consumers to prevent deception.
In particular, considering that
quality control has traditionally found its statutory basis in the
definition of “related company” as per Section 45, this Article
advocates for an amendment to the language of Section 45 by erasing
any reference to the “control” that trademark owners should
330
supposedly exercise.
Instead, a “related company” should be
defined as “any person whose use of a mark is authorized by the
owner of the mark provided that such mark is not used to deceive the
public with respect to the nature and quality of the goods or services
331
on or in connection with which the mark is used.”
328. Parks, supra note 5, at 558.
Elimination of the quality control requirement will result in the consistent
treatment of licensing and non-licensing trademark owners. Licensors will
no longer be forced to attempt adherence to indefinite standards of “quality”
and “control,” at the risk of a judicial holding (however rare) that a licensed
mark has been “abandoned” through uncontrolled licensing. Rather, like
their non-licensing counterparts, licensors will be free to market goods and
services at quality levels consistent with their own business judgment.
Id.
329. See, e.g., Miller v. Glenn Miller Prods., 454 F.3d 975, 992 (9th Cir. 2006) (“A
license agreement need not contain an express quality control provision because
trademark law, rather than the contract itself, confers on the licensor the right and
obligation to exercise quality control.”). But note that most cases do not designate a
license as “automatically” valid, but rather describe conditions in which an
agreement may be determined to be automatically invalid.
330. Currently, section 45 defines “related company” as “any person whose use of
a mark is controlled by the owner of the mark with respect to the nature and quality
of the goods or services on or in connection with which the mark is used.” Lanham
Act § 45, 15 U.S.C. § 1127 (2000); see also discussion supra Part II.B.
331. See Parks, supra note 5, at 568 (advocating for a similar change to the
definition of “related company” in section 45 so that the term “would be construed
to include any entity which has been granted a license by the trademark owner,
regardless of the license terms”).
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397
Despite the criticisms expressed by some scholars and part of the
332
judiciary against “free” licensing, the suggested amendment will
provide a better standard for the validity of licensing, while still
fostering consumer protection. First, this amendment will bring the
statute in line with the majority of judicial decisions and business
reality. More importantly, however, it will eliminate the major flaw in
the current rule—the impossibility to define quality control
consistently. Instead, the proposed amendment will focus the validity
of licensing directly on whether the public has been deceived, thus
providing a much clearer guideline for trademark owners compared
333
to the erratic judicial interpretation of quality control.
This new approach would also close a loophole often used by
trademark infringers to escape liability.
As stressed earlier,
defendants in trademark infringement suits often use the quality
control standard to argue that plaintiffs invalidly licensed their mark
and thus have “unclean hands” and have forfeited their claim of
334
trademark infringement. Under the new standard proposed by this
Article, defendants would still be entitled to question the validity of
the license at issue, but the validity would not rest on the amount of
control exercised by the licensor. On the contrary, the validity of the
license would depend on whether the public would be deceived when
335
purchasing the marked product sold by the licensee.
As a result,
the public and the market will benefit from this change since
trademark owners will focus on actual quality and consumer
deception rather than on control, while litigants will likely refrain
from bringing frivolous suits, thus saving costs and time to the legal
336
system as a whole.
The proposed change in the definition of Section 45 will also bring
uniformity between the statutory definition of “related company” and
the language of Section 5 of the Lanham Act. As indicated earlier,
332. See Lemley, supra note 17, at 1710–11; see also In re Roman Cleanser Co., 802
F.2d 207, 208–09 (6th Cir. 1986); Money Store v. Harriscorp Fin., Inc., 689 F.2d 666,
676–77 (7th Cir. 1982).
333. See discussion supra Part III; see also Calboli, Assignment “With Goodwill,” supra
note 13, at 834 (propping up a new rule of assignment “with or without” goodwill).
334. See discussion supra Part III.A.
335. To elaborate on the scenarios in the Introduction, courts will thus invalidate
the license at issue and possibly declare the forfeiture of trademark rights if two
identically looking HARLEY-DAVIDSON T-shirts or YANKEES hats, which are sold in
the same premises on the same shelf, prove to be of different quality. Likewise,
courts will invalidate the license if the GE phone or SAMSUNG television proves to
be of different quality than the item in the show room or advertised in the
newspaper.
336. Parks, supra note 5, at 558; Friedman, supra note 15, at 364 (generalizing
some of the practical problems that courts and consumers face when trying to grasp
the meaning of the current quality control standard).
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Section 5 does not mention or require direct control on the part of
337
licensors over their licenses. The provision simply requires that the
338
mark not be “used in such a manner as to deceive the public.”
Considering that several courts have already adopted a similar
position in practice and either found evidence of control when
control was minimal or nonexistent, or directly stated that actual
control was not necessary, a change toward licensing with or without
control will have the beneficial effect of bringing the language of the
339
provision in line with reality.
Furthermore, a change in the current requirement will restore
consistency between the requirement for the validity of licensing and
modern trademark practices such as promotional licensing and, inter
alia, assignments and licenses-back. As elaborated in Part IV, even
340
amidst the skepticism of some courts and scholars, the economic
341
relevance of promotional licensing is only destined to grow, and a
clearer standard for the validity of this practice is much needed both
for consumers and trademark owners.
Similarly, despite the
argument that trademark rights do not exist in gross, trademarks are
increasingly treated, and exchanged, as things in and of themselves,
342
as demonstrated daily by modern trademark practices.
Accordingly, to adopt a more flexible standard for the validity of
licensing that still focuses primarily on consumer deception will
benefit the market while providing clearer guidance for licensors and
licensees. Equally importantly, this new standard will also bring
national trademark law closer to the approach followed by the
337. See discussion supra Part III.A.
338. Lanham Act § 5, 15 U.S.C. § 1055 (2000); see Keating, supra note 3, at 378
(stating that the Lanham Act merely prohibits the use of a trademark to
misrepresent goods, and does not expressly require quality control).
339. See Parks, supra note 5, at 531 (“[T]he quality control requirement should be
abandoned as a legal fiction that lacks a sound theoretical foundation, has no
practical benefits, and is inconsistent with the realities of the modern market
place.”).
340. See generally Dogan & Lemley, supra note 34, at 466 (criticizing the theoretical
justification of trademark merchandising).
341. Marks, supra note 5, at 646–47.
Over the last few years, the volume of merchandising activity has grown by
several hundred percent as a few specific examples will show. In 1978, Walt
Disney Productions reported $21.3 million in licensing royalties based on
$427 million in retail sales of licensed products. In 1983, Yves Saint Laurent
S.A. showed a gross income of $27 million, of which $17 million was derived
from licensing.
Id. (footnote omitted).
342. See id. at 652 (discussing the development and growth of promotional
trademark licensing).
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399
majority of other countries, thus eliminating many inconsistencies to
343
the advantage of international trade.
Lastly, the suggested amendment will directly benefit consumers by
enhancing the ability of trademark owners to compete in the
marketplace. Under the new rule, licensors and licensees will be
allowed to alter the quality of the marked products to satisfy not just
344
legal requirements but also market demand and consumer needs,
345
as long as they apply these changes to the whole production, or the
346
Trademark owners will also
public could otherwise be deceived.
enjoy more flexibility in monitoring their licensees and, more
importantly, will not fear unfounded claims of naked licensing in
response to their legitimate claims of infringement. This could save
costs in administering licenses and licensing portfolios and, in turn,
these savings could translate into cheaper prices for marked products
347
to the benefit of consumers.
The proposed amendment will also benefit consumers by
preventing cases where licensors and licensees decide to discontinue
production due to the fact that their mark has been cancelled
because of lack of quality control, regardless of whether or not the
public was deceived.
In these occurrences, consumers and
competition are greatly affected since the number of products
available in the market is reduced, even in the absence of consumer
confusion. Yet, to allow licensing “with or without” control will limit
these occurrences to truly unscrupulous agreements to the benefit of
consumers, who will not otherwise see their product choices
348
reduced.
The same applies when, considering that trademark
cancellation allows other interested parties to use the mark, licensors
343. See 2 LADAS, supra note 222, §§ 715–720; see also discussion supra Part IV.A.
344. See Marks, supra note 5, at 651 (“Trademark theory should provide for
consumer protection, but it should also be flexible enough to permit satisfactory
adaptation to new situations.” (quoting William M. Borchard & Richard M. Osman,
Trademark Sublicensing and Quality Control, 70 TRADEMARK REP. 99, 114 (1980))); see
also Hanak, supra note 8, at 367.
345. Differences in quality standards required by state laws would represent the
only exception to this rule. Friedman, supra note 15, at 373.
346. Interestingly, courts have denied consumer confusion in cases where such
confusion was, instead, very clear. See, e.g., Jordan v. Nissan N. Am., Inc., 853 A.2d
40, 44 (Vt. 2004) (dismissing a consumer fraud claim because of the fact that the
public was not aware that parts of Nissan Quests were produced by Ford Motor
Company); Szajna v. Gen. Motors Corp., 503 N.E.2d 760, 771 (Ill. 1986) (denying
that the mark “Pontiac Ventura” was per se a guarantee of the quality of the car
components).
347. See Calboli, Assignment “With Goodwill,” supra note 13, at 834 (considering
similar arguments to support assignment “with or without goodwill”).
348. For a discussion on the economic aspects of trademark protection,
particularly with respect to the distinctive function of trademarks, see discussion,
supra Part II.A.
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and licensees have to incur extra costs to rename their products and
market them under the new name. Not surprisingly, these extra costs
impact the ability of trademark owners and licensees to compete in
the market and ultimately work to the detriment of consumers, who
349
eventually will carry parts of these costs.
To amend the current
requirement as suggested will thus prevent these additional costs in
most circumstances by limiting trademark cancellation to agreements
that are truly misleading and unfair for the market.
2.
Protecting consumers and the market under the new rule
Despite the many benefits listed above, any shift toward licensing
“with or without control” must still guarantee that the public will
receive accurate information about the quality of the marked
products. In other words, even under the suggested amendment,
licensors and licensees should not be able to use “free” licensing to
deceive or confuse purchasers, because the primary function of
350
trademark law is to protect consumers and the market. As stressed
earlier, consumers are not “legally entitled to receive goods and
351
services of the same quality,” yet licensors and licensees cannot
betray their trust on certain marks by providing, misleadingly and
without notice, products qualitatively different from those previously
352
identified by them.
A shift toward licensing with or without control, however, will not
affect the protection that is currently available to consumers and the
market, should licensors and licensees decide to use a mark to
defraud the public trust. In particular, from a general standpoint, an
amendment to the current language of the Lanham Act will leave
unaffected the current provisions against consumer fraud; that is,
licensors and licensees will be as liable to consumers for the quality of
their products as they are today under the current standard.
Accordingly, the public and the market will continue to rely upon the
remedies granted by consumer protection and product liability laws
349. See Marks, supra note 5, at 648–49, on the costs of licensing. Marks
considers, in particular, the costs incurred by companies that are less sophisticated in
policing and controlling a popular trademark in licensing contexts. Id.
350. See Calboli, Assignment “With Goodwill,” supra note 13, at 836 (stressing that a
regime of assignment in gross will not necessarily detriment competition).
351. Id. at 836.
352. On the contrary, trademark owners should be held liable for consumer fraud
and face the civil and criminal consequences provided by the law. For some of the
relevant provisions, see, for example, Magnuson-Moss Warranty—Federal Trade
Commission Improvement Act, 15 U.S.C. §§ 2301–2312 (2000), and Consumer
Product Safety Act, 15 U.S.C. §§ 2051–2085 (2000 & Supp. IV 2004). See also
RESTATEMENT (SECOND) OF TORTS § 402B (1965) (amended 1998 by RESTATEMENT
(THIRD) OF TORTS: PROD. LIAB. § 9).
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401
353
against any misleading use of a mark.
Likewise, even if more
enforcement could be desirable in these areas of the law in
354
practice, those engaged in abusive licensing will continue to be
held liable for commercial fraud, and pay the consequences provided
355
by civil and criminal laws.
The proposed change will also leave untouched the role currently
played by the Federal Trade Commission (“FTC”) under Section
356
14(5) of the Lanham Act in protecting consumers against the
357
Specifically, according to the
misleading use of trademarks.
provision, “the Federal Trade Commission may apply to cancel . . .
358
any mark” on the grounds that, inter alia, a mark has become
generic, has been registered fraudulently, or misrepresents the
359
source of the marked products.
Even if the FTC has rarely
360
enforced this rule, a transition towards a system of “free” licensing
will not affect its ability to act and cancel trademark registration
361
should any of the conditions listed in the law arise in practice.
353. See, e.g., 15 U.S.C. §§ 2301–2312 (regulating product warranties for the public
and outlining the role of the Federal Trade Commission); id. § 2051 (relating
congressional findings and statements of purpose designed to protect and assist the
public against risks “associated with consumer products”); see also Franklyn, The
Apparent Manufacturer Doctrine, supra note 3, at 675 (arguing that trademark licensors
should be subjected to liability under the apparent manufacturer doctrine when a
licensor induces consumers to believe that the licensor controlled the standards for
manufacturing the product).
354. Franklyn, The Apparent Manufacturer Doctrine, supra note 3, at 721.
355. See, e.g., 15 U.S.C. § 2069 (providing civil penalties for the violation of 15
U.S.C. § 2068); id. § 2070 (providing for criminal penalties for the violation of 15
U.S.C. § 2068); see also Calboli, Assignment “With Goodwill,” supra note 13, at 841
(noting that the same provisions will continue to operate in a regime of assignment
“with or without goodwill”).
356. 15 U.S.C. § 1064(5) (2000); see Calboli, Assignment “With Goodwill,” supra note
13, at 841 n.360 (highlighting the role of the FTC with respect to the misleading use
of trademarks in the context of trademark assignment).
357. See Jacob Siegel Co. v. FTC, 327 U.S. 608, 611–12 (1946) (reaffirming the
power of the FTC in these areas). “The Commission has wide discretion in its choice
of a remedy deemed adequate to cope with the unlawful practices in this area of
trade and commerce.” Id. at 611.
358. Lanham Act § 14(5), 15 U.S.C. § 1064(5).
359. Lanham Act § 14(3), 15 U.S.C. § 1064(3). The FCT can also cancel a
certification mark, at any time, when the mark is in use without the owner’s control
or if the mark’s use may mislead the public. Lanham Act § 14(5), 15 U.S.C.
§ 1064(5).
360. See Hanak, supra note 8, at 373 (stressing that “the Commission rarely has
used the authority granted” while pointing out one “notable” exception found in
Bart Schwartz International Textiles, Ltd. v. Federal Trade Commission, 289 F.2d 665
(C.C.P.A. 1961)).
361. Bart Schwartz, 289 F.2d 665 (C.C.P.A. 1961), represents the most noticeable
example where the FTC used its authority to restore fair market competition and
consumer protection under the Lanham Act. “The obligation which the Lanham
Act imposes on an applicant is that he will not make knowingly inaccurate or
knowingly misleading statements in the verified declaration forming a part of the
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In addition, the role of supervision of the FTC is not limited to the
wording of the Lanham Act. Notably, under Section 5 of the Federal
362
Trade Commission Act (“FTCA”), the FTC is granted the authority
to prevent, in general, acts of unfair competition. This capacity also
extends to all instances where a mark is used to deceive or confuse
363
the public.
In this respect, the FTC has often enforced its power,
warning trademark owners not to use their marks misleadingly and
364
prohibiting “the use of trademarks that inherently are deceptive.”
Here again, the proposed standard will not affect the status quo, and
the FTC will continue to operate in the same capacity to protect
365
consumers and competition in the marketplace.
Furthermore, from a strict trademark law standpoint, occurrences
involving abusive licenses—whether under a regime of “free”
licensing or “with quality control”—will continue to fall within the
provision of Sections 14 and 45 of the Lanham Act, and courts can
continue to use these rules to declare unfair licensing invalid and
366
cancel the corresponding marks.
Even more importantly, the
application for registration.” Id. at 669. See FTC v. Wolf, No. 94-8119, 1996 U.S. Dist.
LEXIS 1760, at *14 (S.D. Fla. Jan. 30, 1996).
362. 15 U.S.C. §§ 41–58 (2000 & Supp. V 2005).
363. According to Section 5(a)(1) of the FTCA, “[u]nfair methods of competition
in or affecting commerce, and unfair or deceptive acts or practices in or affecting
commerce, are hereby declared unlawful.” 15 U.S.C. § 45(a)(1). Section 5(n)
defines “unfair” practices as practices that “cause . . . or [are] likely to cause
substantial injury to consumers which is not reasonably avoidable by consumers
themselves and not outweighed by countervailing benefits to consumers or to
competition.” Id. § 45(n).
364. Hanak, supra note 8, at 373. Interesting examples in this respect are R.
Neumann & Co. v. Overseas Shipments, Inc., 326 F.2d 786, 788 (C.C.P.A 1964), where
the court denied registration for potentially misleading mark, and Gaffrig Performance
Indus. v. Livorsi Marine, Inc., No. 99 C 7822, 2003 U.S. Dist. LEXIS 23018, at *58
(N.D. Ill. Dec. 19, 2003), where the court canceled a misleading trademark
registration. “It is well settled by the decisions of this court and other courts of
competent jurisdiction that no trademark rights can be acquired in a trademark that
is deceptive or deceptively misdescriptive.” Neumann, 326 F.2d at 788.
365. In addition, the suggested amendment will not increase the cost of FTC’s
supervision over misleading uses of trademarks since it does not add any new power
to the FTC. Simply, it demands that the FTC will continue to control the correct
functioning of the market as it has done, or should have done, until present. See
Calboli, Assignment “With Goodwill,” supra note 13, at 841 (stating that a rule of
assignment “with or without goodwill” will not affect the FTC’s ability to regulate the
market); see also Arthur Best, Controlling False Advertising: A Comparative Study of Public
Regulation, Industry Self-Policing, and Private Litigation, 20 GA. L. REV. 1, 20–25 (1985);
Thomas L. Ruffner, The Failed GE/Honeywell Merger: The Return of Portfolio-Effects
Theory?, 52 DEPAUL L. REV. 1285, 1299 (2003) (briefly outlining the FTC’s role in the
marketplace).
366. See Calboli, Assignment “With Goodwill,” supra note 13, at 837 (making a similar
argument against the rule of assignment “with goodwill”); cf. Dawn Donut Co. v.
Hart’s Food Stores, Inc., 267 F.2d 358, 367 (2d Cir. 1959) (“If the licensor is not
compelled to take some reasonable steps to prevent misuses of his trademark in the
hands of others the public will be deprived of its most effective protection against
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403
proposed amendment will leave untouched the provision of Section
43(a) of the Lanham Act under which competitors can bring civil
suits, at any time, if a mark has been registered fraudulently or is used
367
to mislead the public as to the origin of the marked products.
Accordingly, competitors will continue to be able to call upon this
368
rule to bring actions against abusive licensors and licensees and
courts will retain the ability to cancel, or declare abandoned, the
marks at issue also under a standard of licensing “with or without
369
control.”
Simply put, under the proposed standard, courts will focus directly
on the result of licensing—whether consumers are confused or
misled—rather than on the conduct of licensors—whether they
exercised quality control—to assess the validity of the agreements at
misleading uses of a trademark. . . . Clearly the only effective way to protect the
public where a trademark is used by licensees is to place on the licensor the
affirmative duty of policing in a reasonable manner the activities of his licensees.”).
367. See Lanham Act § 43(a), 15 U.S.C. § 1125(a) (2000):
(a) Civil action
(1) Any person who, on or in connection with any goods or services, or
any container for goods, uses in commerce any word, term, name,
symbol, or device, or any combination thereof, or any false designation
of origin, false or misleading description of fact, or false or misleading
representation of fact, which—
(A) is likely to cause confusion, or to cause mistake, or to deceive as
to the affiliation, connection, or association of such person with
another person, or as to the origin, sponsorship, or approval of his
or her goods, services, or commercial activities by another person, or
(B) in commercial advertising or promotion, misrepresents the
nature, characteristics, qualities, or geographic origin of his or her
or another person’s goods, services, or commercial activities, shall be
liable in a civil action by any person who believes that he or she is or
is likely to be damaged by such act.
Id.; see also Calboli, Assignment “With Goodwill,” supra note 13, at 837–38 (noticing that
the provision will continue to operate under a regime of assignment “with or without
goodwill”).
368. See supra note 315. As indicated by 5 MCCARTHY, supra note 1, § 27:39, “[a]t
one point in Congress, a House version of the bill which eventually led to the
Trademark Law Revision Act and the rewriting of § 43(a) contained language
expressly giving consumers the right to sue for a violation of § 43(a).” Id. (citing
H.R. REP. NO. 100-1028, at 13–15 (1988)). However, “the provision was deleted in a
House-Senate Conference Committee.”
Id.
McCarthy also points out that
“Representative Kastenmeier inserted a statement in the record to the effect that he
believed that consumers have standing under the case law and that the deleted
consumer standing proposal would only have ‘clarified that law.’” Id. (citing 134
CONG. REC. H10419 (daily ed. Oct. 19, 1988) (statement of Rep. Kastenmeier)). In
support of consumer standing under the Lanham Act, see Tawnya Wojciechowski,
Letting Consumers Stand on Their Own: An Argument for Congressional Action Regarding
Consumer Standing for False Advertising Under Lanham Act Section 43(a), 24 SW. U. L. REV.
213 (1994).
369. Unfortunately, courts have never held that inconsistent product quality
amounts to a violation of Section 43(a) of the Lanham Act under the theory that
inconsistent product quality misrepresents the marked good or services. Parks, supra
note 5, at 552–53.
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issue. Courts will then assess variation in product quality as part of a
general assessment of the validity of the contracts under scrutiny and,
to this end, will use the provision of Sections 14 or 45, or Section
43(a), to establish whether any existing difference is likely to deceive
the purchasing public. Since, however, trademark licensing often
extends to unrelated products, courts should consider quality
variations primarily among the same kind of products—that is,
RALPH LAUREN sunglasses versus RALPH LAUREN sunglasses, and
not other RALPH LAUREN products. Specifically, courts should
evaluate whether any existing difference in quality is likely to deceive
the public by using factors similar to those that are traditionally used
370
to establish trademark infringement.
Ultimately, courts should
invalidate any agreement where even a minor part of the public is
likely to be deceived by a different product quality. Courts should
allow agreements to stand when confusion and deception cannot be
371
found.
Generally, when assessing the consistency of product quality, courts
should also consider whether any variation in such quality is required
372
by law and should presume licenses valid as long as all new products
370. For a general overview of the factors taken into account by the courts while
assessing trademark infringement, see GRAEME B. DINWOODIE & MARK J. JANIS,
TRADEMARKS AND UNFAIR COMPETITION: LAW AND POLICY 469–71 (2004). In particular,
although no list of factors is per se exclusive, factors listed by the Second Circuit in
Polaroid Corp. v. Polaroid Electronics Corp., 287 F.2d 492 (2d Cir. 1961), are often
cited as the most complete:
[T]he prior owner’s chance of success is a function of many variables: the
strength of his mark, the degree of similarity between the two marks, the
proximity of the products, the likelihood that the prior owner will bridge the
gap, actual confusion, and the reciprocal of defendant’s good faith in
adopting its own mark, the quality of defendant’s product, and the
sophistication of the buyers.
Id. at 495.
371. Accordingly, as long as all HARLEY-DAVIDSON T-shirts or YANKEES hats
that are sold in the same premises and on the same shelf, i.e., as the same items to
the public, are of identical quality, courts should allow the license at issue to stand
regardless of whether the trademark owners exercised any control. The same is
applicable to all other scenarios in the Introduction: as long as the quality of the
same marked products is identical, i.e., consumers cannot be deceived, courts should
not declare licenses invalid because of lack of quality control.
372. Product quality is not only affected by licensor and licensee control, but also
by laws, regulations, and consumer demand. For example, many restaurants,
including franchising chains such as MCDONALD’s, have recently changed wellknown recipes in order to eliminate trans fats from their menus, in response to a
demand for healthier products. See Jeannine DeFoe, Food Makers Get on a Health Kick:
PepsiCo, Kraft, and others are making strides in reducing trans fats and producing healthier
foods to meet consumer demand, BUS. WK. ONLINE, Dec. 14, 2006, http://www.businesswe
ek.com/print/investor/content/dec2006/pi20061214_187559.htm; see also 21 C.F.R.
§ 101.45 (2007) (detailing strict labeling requirements for foods containing trans
fats). To return to the examples offered in the Introduction, GE phones and
SAMSUNG TVs also change over time as technology progresses and new product
2007]
THE SUNSET OF “QUALITY CONTROL”
405
373
follow the new quality guidelines.
However, if quality variation
applies only to part of the marked products without a specific reason,
374
such as changes in state laws or geographical differences, courts
should presume the licenses invalid because the public could be
375
deceived.
Finally, courts should look at the efforts that licensors and licensees
have undertaken to notify the public of any variation in product
376
quality.
In particular, courts should not invalidate agreements
when the packaging of the products or the premises where they are
sold contain disclaimers or labels that exhaustively indicate the
quality variation so that the average consumer will unlikely be
377
mistaken about the actual quality of the products at issue.
Traditionally, courts have looked at disclaimers with diffidence, yet
even if part of the public will not be aware of the commercial
advertising the new quality of GE phones, or pay attention to the
labels and signs on the seller’s premises indicating the changes in the
quality of SAMSUNG televisions or RALPH LAUREN sunglasses,
these actions can serve as evidence that licensors and licensees
lines reach the market. Consumers demand new technology, and as new products
are introduced into the market, quality changes. For example, GE’s website offers an
innovation timeline that lists three to four “innovations” per year, including the
releases of new technology (phones and otherwise) into the market. General
Electric, Explore the Innovation Timeline, http://www.ge.com/innovation/timeline
/index.html (last visited Sept. 30, 2007).
373. See supra note 371.
374. See, e.g., Friedman, supra note 15, at 375 (considering the quality control
requirement in the context of permissible variable uses of similar trademarks in
diverse geographical areas).
375. See supra note 367; see also Calboli, Assignment “With Goodwill,” supra note 13, at
838–39 (elaborating a similar test for a proposed rule of assignment “with or without
goodwill”).
376. “Courts have uniformly held that an adequate explanation negates the
possibility of deception and hence the loss of trademark rights.” Hanak, supra note
8, at 374. Specifically, the author uses the case of Hy-Cross Hatchery, Inc. v. Osborne,
303 F.2d 947 (C.C.P.A. 1962), as an example where the court “held that a change in
the breed of chickens did not constitute grounds for cancellation of the trademark
when ‘the type of chick appears to have been otherwise indicated by the trademark.’”
Hanak, supra note 8, at 374 (citation omitted). Hanak also discusses the decision in
Menendez v. Faber, Coe & Gregg, Inc., 345 F. Supp. 527 (S.D.N.Y. 1972), where
“enforceable rights in a trademark formerly applied to cigars made exclusively in
Cuba of Cuban tobacco were not forfeited when the mark was applied to cigars made
in Florida of non-Cuban tobacco since the fact was stated on the cigar boxes.”
Hanak, supra note 8, at 374.
377. See Carter v. Joseph Bancroft & Sons Co., 360 F. Supp. 1103, 1106–08 (E.D.
Pa. 1973); Franklyn, The Apparent Manufacturer Doctrine, supra note 3, at 707; see also
Lynn M. LoPucki, Toward a Trademark-Based Liability System, 49 UCLA L. REV. 1099,
1119–21 (2002) (discussing the use of disclaimers by trademark owners with respect
to the use of trademarks by licensees).
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adopted adequate means to inform, and did not intend to mislead,
378
consumers.
Notices to the public will not help consumers when licensors or
licensees intend to act in bad faith and still take advantage of
379
consumer reliance on a certain mark.
These instances, however,
represent clear examples of consumer fraud and accordingly, as
mentioned earlier, should be punished as such by using the tools that
are already available to the courts.
CONCLUSION
As consumers, we will likely not care whether HARLEYDAVIDSON, the YANKEES, or WESTLAW control the manufacturers
of their promotional products, as long as the quality of these
products is the same or we are made aware of any changes. Likewise,
we will likely not care whether PIZZA HUT, GE, or SAMSUMG
control their licensees as long as the products we buy are identical to
those advertised and shown in the store before our purchases. Yet
should one of these marks ever be cancelled or declared abandoned
because its owner has not sufficiently controlled its licensees, we
would undoubtedly be confused if a third party with no connection to
the original business started to use the mark.
As this Article has illustrated, a trademark licensor’s failure to
control its licensees does not necessarily trigger consumer deception.
Instead, such deception is generally triggered by the (unfair) actions
of licensors and licensees.
Although indirectly, courts have
confirmed this view by increasingly upholding licensing with minimal
or no control as long as consumers are not deceived. Still, the official
standard continues to hold trademark owners liable for the lack of
quality control, thus leaving the door open to judicial inconsistency
as to what represents valid licensing. The suggested amendment in
favor of licensing “with or without control” will resolve this
inconsistency and finally reconcile the conditions for the validity of
licensing with the market necessity of a flexible standard on this issue.
Even if many will criticize it, this amendment will not have negative
consequences on consumers, and the judiciary has many alternative
ways to enforce and prevent deceptive and confusing licensing. In
378. See Hanak, supra note 8, at 374 (stating that clearly explaining any changes in
the product to the public may preclude a finding of deception); see also Calboli,
Assignment “With Goodwill,” supra note 13, at 837 (underlying the role of disclaimers
in support of assignment “with or without goodwill”).
379. See Hanak, supra note 8, at 374–75 (describing a case in which a token change
in labeling was not adequate to overcome a finding of deception).
2007]
THE SUNSET OF “QUALITY CONTROL”
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addition, it is likely to improve competition in the marketplace, and
accordingly should be welcomed by all parties.